US FOMC Meeting Minutes

The manager turned first to a review of developments in financial markets. Nominal Treasury yields declined notably over the period, driven by weaker-than-expected data releases—especially the July employment report in early August—and policy communications that were seen as affirming expectations that a reduction in policy restraint would begin at this meeting. The decline in nominal yields over the period was primarily attributable to lower expected real yields, but measures of inflation compensation declined as well. Broad equity prices finished the period modestly higher, while credit spreads had come off the very tight levels seen earlier this year but were still narrow by historical standards. Overall, risky asset prices were compatible with continued economic expansion. The manager also discussed the brief episode of elevated market volatility in early August. That episode saw some large moves in U.S. and foreign equity indexes, equity-implied volatilities, the dollar–yen exchange rate, and Treasury yields. These sharp moves appeared to be the result of a rapid unwinding of some speculative trading positions induced by unrelated events—such as the unexpectedly inflation-focused communications from the Bank of Japan (BOJ) in late July and the weaker-than-expected U.S. employment report in early August—and amplified by technical and liquidity factors. All told, the unwinding process was contained, and market functioning recovered relatively quickly. Turning to policy expectations, the manager noted that the market-implied policy rate path shifted down materially. At the time of the September meeting, the modal path for the federal funds rate implied by options prices was consistent wit post: *FED: 'SOME' OFFICIALS WOULD HAVE PREFERRED QUARTER-POINT CUT *FED: 'SUBSTANTIAL MAJORITY' BACKED HALF-POINT RATE CUT post: FED MINUTES: ALMOST ALL PARTICIPANTS AGREED UPSIDE RISKS TO INFLATION HAD DIMINISHED. post: FED MINUTES: SEVERAL DISCUSSED IMPORTANCE OF COMMUNICATING QUANTITATIVE TIGHTENING COULD CONTINUE FOR 'SOME TIME' EVEN AS RATES ARE REDUCED

The manager turned first to a review of developments in financial markets. Financial conditions eased modestly over the intermeeting period, reflecting lower long-term interest rates and higher equity prices. The manager noted that current financial conditions appeared to be providing neither a headwind nor tailwind to growth. Nominal Treasury yields declined over the period, with shorter-term yields having decreased by more than longer-term yields, leading to a steepening of the yield curve. Treasury yields remained sensitive to surprises in economic data, particularly consumer price index releases and employment reports. While near-term inflation compensation fell over the intermeeting period, longer-term forward measures were little changed. Measures of inflation expectations obtained from term structure models were modestly lower. The policy rate path derived from futures prices and the modal path derived from options prices both declined over the intermeeting period and had come into closer alignment with the median of the modal responses from the Open Market Desk’s Survey of Primary Dealers and Survey of Market Participants. Policy expectations, however measured, pointed to a first rate cut at the September FOMC meeting, at least one more cut later in the year, and further policy easing next year. In the equity markets, the high perceived likelihood of a September cut in the target range for the policy rate induced a notable appreciation in the stocks of firms with small and medium capitalization, which tend to be more sensitive to interest rates. Stocks of larger companies, especially those in the technology sector, underperformed. Second-quarter earnings reports received before the meeting had been slightly above analysts’ expectations, althoug post: *FED: 'VAST MAJORITY' SAW SEPTEMBER CUT AS LIKELY APPROPRIATE post: FOMC MINUTES: INFLATION EASING, SOME SUPPORT FOR A QUARTER-POINT CUT #FOMC #FederalReserve #economy post: FED MINUTES: **PARTICIPANTS VIEWED INCOMING DATA AS ENHANCING THEIR CONFIDENCE THAT INFLATION WAS MOVING TOWARD 2% OBJECTIVE **SEVERAL PARTICIPANTS SAID RECENT PROGRESS ON INFLATION AND INCREASES IN UNEMPLOYMENT RATE PROVIDED A 'PLAUSIBLE CASE' FOR A 25-BASIS-POINT RATE…