Last week was recession week as the brief yield curve inversion launched a thousand headlines promising economic destruction. Every newspaper had a recession headline or story above the fold. Although there were several days of decent market swings, the recession story seems to have run out of gas as people looked at the actual numbers. The minutes from the latest Federal Reserve meeting further cooled the rhetoric. Journalists may have expected the last Fed meeting was Thunderdome as there was some disagreement among Fed members on whether to hike or not. Instead, the minutes painted a much different view.
So what do the minutes from the last Federal Reserve meeting say?
Labor is strong and inflation is under control. The rest of the world is struggling a bit, but it hasn’t made a huge impact on the US economy. Trade policy uncertainty seems to be here to stay in the medium term, but actual impact has been largely limited to business capital spending (and modestly, at that). Consumer spending remains robust. Downside risks are diminished and there are bright spots with the budget and debt ceiling agreements. There is potential large upside if trade negotiations are resolved.
The labor market is strong
“Participants agreed that the labor market had remained strong over the intermeeting period and that economic activity had risen at a moderate rate. Job gains had been solid, on average, in recent months, and the unemployment rate had remained low.”
How about the dual mandate of low unemployment and 2% inflation?
“Participants continued to view a sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes.”
“inflation pressures continued to be muted”
“A few participants noted differences in the behavior of measures of cyclical and acyclical components of inflation. By some estimates, the cyclical component of inflation continued to firm; the acyclical component, which appeared to be influenced by sectoral and technological changes, was largely responsible for the low level of inflation and not likely to respond much to monetary policy actions.” [This is pretty cool since it mentions technology’s tendency to increase or change quality of life, but with little, no, or even decreasing cost! -Matt-]
How does this look relative to the global economy?
“Participants generally noted that incoming data over the intermeeting period had been largely positive and that the economy had been resilient in the face of ongoing global developments.”
Trade policy uncertainty lingers
“… trade policy uncertainty, although waning some over the intermeeting period, remained elevated and looked likely to persist.”
“participants generally saw uncertainty surrounding trade policy and concerns about global growth as continuing to weigh on business confidence and firms’ capital expenditure plans.”
“business contacts were making decisions based on their view that uncertainties around trade were not likely to dissipate anytime soon.”
“Some participants expressed the view that the effects of trade uncertainty had so far been modest and referenced reports from business contacts in their Districts that investment plans were continuing, though with a more cautious posture.”
Consumer spending is almost 70% of GDP
“Participants commented on the robust pace of consumer spending. ”
“Participants generally judged that downside risks to the outlook for economic activity had diminished somewhat since their June meeting.”
“In addition, many participants noted that the recent agreement on the federal debt ceiling and budget appropriations substantially reduced near-term fiscal policy uncertainty. Moreover, the possibility of favorable outcomes of trade negotiations could be a factor that would provide a boost to economic activity in the future.”
“In their discussion of financial market developments, participants observed that financial conditions remained supportive of economic growth, with borrowing rates low and stock prices near all-time highs. ”
What news will come out of Jackson Hole, Wyoming, tomorrow? Nobody knows. I think the Fed will continue to pay lip service to following the data, but with an eye to appeasing (trying to limit the volatility of) a stock market that is at times way too focused on the Fed. Folks hoping for recession (mostly media) will be disappointed. Then again, anything’s possible. Bull markets and economic expansions don’t die from old age, they are killed by policy mistakes.