By: Rhona O'Connell, Head of Market Analysis
The FOMC Minutes, June; hawks clearly circling – but income levels give grist to the doves’ mill
Further Treasury issuance will be a headwind for gold
Fed dot plots, March and June
The Staff Review of both the economic and financial situations were clearly laying the foundations for further tightening in H2. This will not come as a surprise, but the tone was threaded right the way through the Staff’s text. That said, it is not all a one-way street and there are elements of risk that will need to be addressed or, at the very least, monitored.
The Staff Review of the Economic Situation dropped the May references to tightening bank credit conditions, tacitly implying that the tensions surrounding the issues in March and May had dissipated; we would still caution that banking strains do not disappear overnight and some analysts are warning of potential stress due to higher rates and weaker housing. In the Financial Review the Staff did allude to banks’ ability to fund loans “remained somewhat strained relative to before the closure of SVB in March”.
The stance on employment (tight labour market) and inflation (elevated) was almost unchanged, but there was one notable difference: whereas in May the Staff had noted that consumer price inflation, while elevated in March, had continued to slow; a month later the view was that while total PCE had eased since mid-2022, “recent readings for core PCE price inflation… were little changed” at 4.7% in April, the same level as that recorded in January and clearly way too high for the Fed’s comfort.
Underlying growth was deemed to be expanding more slowly than the “robust” Q1 pace but for the first half as a whole, appeared to be more resilient than in H2 2022.
The Review of the Financial Situation pointed to higher Treasury yields on the back of incoming data that had implied more resilience than previously assumed and all the relevant parameters except for interest on auto loan rates reflected higher rates, which stood at, or near, their highest levels since the Global Financial Crisis.
Committee Members: - slightly more cautious in their overview of the economic prospects, introducing the word “uncertainty” over the lags with which monetary policy affects the economy. Similarly the effect on the economy of tighter credit conditions was “uncertain” and it does appear that this will be under their scrutiny in the weeks and months to come.
Some early signs of problems
Some fractures were evident with a couple of participants noting the discrepancy between robust GDP and weak GDI, implying that economic momentum may be less strong than GDP might suggest. Signs that the labour market is coming back towards balance, while the lack of affordable housing in some areas is preventing some lower-income workers from relocating in order to accept jobs, and that some measures of employment “Bureau of Labor Statistics’ household survey, the Quarterly Census of Employment and Wages, or the Board staff’s measure of private employment using data from the payroll processing firm ADP—suggested that job growth may have been weaker than indicated by payroll employment”. [One month later, though (i.e. this week) and the equivalent numbers were very strong].
Even so the conclusion was that the labour market remained “very tight”.
While there was consensus that a further moderation in the pace of policy firming was appropriate there does appear to be an increasing groundswell of concern over the downside risks to growth, upside risks to unemployment and the need to keep their eyes on the banking sector. Post debt ceiling, the likelihood of more Treasury issuance could put further upward pressure on money market rates, which is a fresh headwind for gold.
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