FOMC: Continued Wide Disagreement

Overview: The minutes from the August 5 monetary policy meeting were released last night at 20:00 CET. Compared to the meeting statement and the recent Fed communication the minutes did not reveal much new information. However, the disagreement within the committee remains wide; the general impression from the minutes is that the monetary policy will remain on a firm hold for now.

Given this 'well-anticipated' message the market reaction was generally muted, with the Treasury curve moving little. Neither the USD nor the equity markets took much essence from the release.

Details: Disagreement among the members continues to be very evident. That said, the general view appeared to be that growth risks increased over the intermeeting period, as financial conditions deteriorated and signs became evident that consumer spending and export demand was slowing amid a continued weakening of the labour market. The staff lowered the growth forecast for the second half of 2008 and for 2009. It now expects GDP growth below potential through the first half of next year. The committee members see growth as weak in the remainder of 2008 before recovering modestly next year.

Inflation concerns generally remained high with the concern of a de-anchoring of inflation expectations being particularly prevalent. However, declining commodity prices and subdued growth in unit labour costs were mentioned as factors that would eventually help inflationary pressures coming off the boil. While the committee continues to expect a moderation in core inflation next year, it emphasises that some upside risks are present on the short horizon as second round effects from high food and energy prices are passing. This suggests that committee members will not be shocked by seeing a minor pick-up in core inflation over the coming months as long as inflation expectations do not move higher.

Regarding the monetary policy stance, the minutes noted that 'most members did not see the current policy 's stance as particularly accommodative, given that many households and businesses were facing elevated borrowing costs and reduced credit availability due to the effects of financial market strains as well as macroeconomic risks'. While this suggests that interest rate hikes are not imminent, the paragraph also mentioned that ´the members generally anticipated that the next policy move would likely be a tightening´.

Assessment & Outlook: The content of the minutes does not change our previous assessment that the FOMC is set to keep monetary policy on hold well into next year. With the financial market remaining fragile, growth well below potential, and some easing in the inflationary pressure from lower oil prices, the FOMC should be in no hurry to normalise monetary policy.

Danske Bank

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