Citi economists Andrew Hollenhorst and Veronica Clark warn that the minutes may confirm that financial markets misconstrued comments from Fed Chairman Jerome Powell during his post-meeting press conference. Many economists and investors interpreted a dovish pivot, or a step in that direction, but Hollenhorst and Clark say that was a misreading.
They add that subsequent commentary out of dovish central bankers, including Chicago Fed President Charles Evans and San Francisco Fed President Mary Daly, suggest the Fed plans to continue tightening regardless of the July slowdown in inflation. The July rate hike brings the Fed’s short-term policy rate to a range of 2.25% to 2.5%.
The minutes might provide clarity over one point in particular. Powell said the Fed had reached the so-called neutral rate, where interest rates are neither accommodative or restrictive. Some economists, including former Treasury Secretary Larry Summers, criticized the comment for not taking into account the current rate of inflation. The point is that “neutral” is higher than normal, when inflation is near the 2% target.
The Citi economists say that while the minutes might note that policy rates have reached the “long run” neutral range, they expect “several,” if not “many,” noted that the current appropriate setting of the policy rate is either above neutral or that neutral has moved higher due to sustained higher inflation.
Investors may also get insight into the timing of a coming slowdown in rate increases. Powell wasn’t specific when he mentioned hikes would eventually slow, and Hollenhorst and Clark say another 0.75-percentage-point increase in September is likely before a half-point hike in both November and December.
Last, Powell only got one question about balance-sheet shrinkage at his July press conference. Quantitative tightening, or the partial reversal of quantitative easing after the Fed bought trillions of dollars in bonds during the pandemic, is set to ramp up in September. Some officials have suggested the Fed will have to sell mortgage-backed securities in order to shrink its balance sheet more quickly. Any suggestion in the minutes that this topic will be discussed at the September Fed meeting would be a hawkish surprise, the Citi economists say.