FOMC Minutes Hint At Exit Strategy

Usually FOMC minutes do not matter so much because much of the data is known or assumed, but when monetary policies are in the midst of an inflection point or soon to change they are important to investors and traders alike.   There are three major takeaways from the FOMC Minutes from the June meeting:

• The FOMC is starting to look for its exit strategy to its zero-rate, or at least admits it is starting to consider that.
• Second, the FOMC has noted some inflationary concerns.
• Third, the FOMC expects that the economy will be better or less-bad than prior projections in both 2009 and 2010; but expectations for unemployment are now expected to be worse than before.

A fourth notion, which is a summary of all, is that the FOMC sees the recession ending before long.  While an exit strategy has been hinted at, changes to its asset purchases are not warranted yet and its backup liquidity facilities should be extended into early 2010.  The notes do say that the economy is still very weak and vulnerable to shocks.  The note on inflation is that it is expected to remain low but there are less risks downside risks.

There is some food for thought here.  The FOMC rarely likes to raise rates at a time when unemployment is still rising.  That would require a much more ‘evidenced’ inflation such as rapid price increases or a return to commodity prices rising.  But giving the hint that it is seeing an end at some point soon to the recession and the other comments does lend credibility to the opinion we have that the FOMC is now telegraphing that it is looking for an exit strategy to the very low to zero interest rate policy.  We still would not expect a major change immediately, but this is Fed-Speak for “Don’t tell us that we didn’t warn you that this free money and this yield curve would last forever.”

As far as the actual figures, those are available here are the link to the full FOMC minutes.

JON C. OGG