Reads like a white paper on stagflation

When it comes to the FOMC minutes, I always just immediately scroll down to the section titled “Participants’ Views on Current Conditions and the Economic Outlook” and skip the staff discussion. After reading the first few paragraphs on the economy, one would think the Fed was ready to cut interest rates until the discussion on inflation begins and then we’re woken out of our dream and the reality of the stagflationary situation kicks in.

This is what was said on the economy:

“With regard to current economic activity, participants noted that consumer expenditures, housing activity, business investment, and manufacturing production had all decelerated from the robust rates of growth seen in 2021… Participants observed that indicators of spending and production suggested that the second quarter of this year had seen a broad-based softening in economic activity. Many participants remarked that some of the slowing, particularly in the housing sector, reflected the emerging response of aggregate demand to the tightening of financial conditions associated with the ongoing firming of monetary policy.”

“In their discussion of the household sector, participants commented that they were seeing many signs in the data, and hearing reports from business contacts, of slower growth in consumer spending.”

“With respect to the business sector, participants noted that investment spending had likely declined in the second quarter. In addition, business survey data and information received from contacts indicated that manufacturing orders and production had fallen in some Districts. Heightened uncertainty, concerns about inflation, tighter financial conditions, and a cutback in consumer spending had led firms to downgrade economic prospects.”

The talk on the labor market was mostly positive but “Many participants also noted, however, that there were some tentative signs of a softening outlook for the labor market: These signs included increases in weekly initial unemployment insurance claims, reductions in quit rates and vacancies, slower growth in payrolls than earlier in the year, and reports of cutbacks in hiring in some sectors. In addition, although nominal wage growth remained strong according to a wide range of measures, there were some signs of a leveling off or edging down.”

The reminder though on why they will continue to hike interest rates, “Participants observed that inflation remained unacceptably high and was well above the Committee’s longer-run goal of 2 percent. In light of the high CPI reading for June, participants noted that PCE inflation was likely to have increased further in that month. Participants further observed that inflationary pressures were broad based, a pattern reflected in large one-month increases in the trimmed mean CPI and core CPI measures.”

They talked about the recent puts and takes with inflation with regards to the drop in gasoline price, some easing of the supply bottlenecks but also the high cost of living still for many.

With respect to what comes next, “participants continued to anticipate that ongoing increases in the target range for the federal funds rate would be appropriate to achieve the Committee’s objectives. With inflation remaining well above the Committee’s objective, participants judged that moving to a restrictive stance of policy was required to meet the Committee’s legislative mandate to promote maximum employment and price stability.”

They mentioned that “it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation.” This is stating the obvious but I repeat that I think they’ll hike by 50 bps next month to finally get to 3% and then play it by ear thereafter to follow up to this quote of theirs.

Of note, and different than what markets are used to, “Some participants indicated that, once the policy rate had reached a sufficiently restrictive level, it likely would be appropriate to maintain that level for some time to ensure that inflation was firmly on a path back to 2 percent.” I say different because what’s happened in the past is the Fed hikes us into a recession, things crack and they are then quick to cut.

Seemingly forgotten by many market participants and not discussed much in the minutes is the coming reality of max QT, where it doubles in size two weeks from tomorrow. The result of it is unknown, and Powell acknowledged that himself a few press conferences ago. But, if there is any symmetry in life, if QE was purposely meant to ease financial conditions and lift stock prices, shouldn’t we expect the opposite with QT?

The 2 yr yield came off its highs in response to the likelihood of a slower pace of rate hikes from here. The 10 yr is down a few bps too from its intraday high. The dollar is weaker in response too. Stocks are gyrating in the standoff solely dependent on one’s belief on the Fed stance from here.