GS: The July FOMC minutes indicated that participants thought that “at some point” it would likely become appropriate to slow the pace of hiking while assessing the impact from tighter financial conditions, consistent with our forecast that the FOMC will slow the pace of hiking to 50bp in September and 25bp in November and December. The Fed staff’s forecast for economic growth was “noticeably weaker” than at the June meeting, while participants generally judged that the bulk of the effects of tighter financial conditions on economic activity had yet to be felt. The inflation language in the minutes was hawkish but broadly as expected, and several participants stressed that supply chain improvements and lower commodity prices might not be enough to resolve the imbalances in the economy.

 

MS:  More restrictive policy stance is warranted, but there was emphasis that economic activity and inflation responds to monetary policy with a delay. As such, we continue to expect the Fed to remain on an aggressive path of policy tightening but 75s are likely behind us. The minutes noted that “Participants judged that, as the stance of monetary policy tightened further, 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.” As a reminder, we continue to expect the Fed to deliver a 50bp hike in September and November, followed by a 25bp hike in December, where we think the Fed stops at a 3.625%.

 

Citi: Citi Economics’ Andrew Hollenhorst said, “FOMC minutes were neutral, noting risk of both over and under-tightening (Bloomberg “red” headline misleading highlighted just the dovish over-tightening risk). Notable the committee concurred they were showing “resolve” and “credibility” through “forceful policy” by tightening financial conditions…especially given the rapid loosening of financial conditions since the June FOMC. Chair Powell may now feel the need to push more hawkish either at Jackson Hole or in other public comments. We continue to expect a 75bp hike in September.”

– USD OIS rates are still pricing ~50% probability of a 75bp move in September, but we expect pricing to continue adjusting higher as we get more data, hear from more Fed speakers, and listen to Powell’s thoughts at Jackson Hole at the end of August. While notable data on Thursday is limited to jobless claims, we will hear from Fed’s George (historically hawkish) and Fed’s Kashkari (dove turned hawk last week). Markets will likely be sensitive to Fedspeak headlines, especially as we get closer to September.

 

NWM: With the real funds rate still well below average, the Fed still has a way to go regarding future rate hikes and the level of neutrality takes on increasing significance. Going back to 1960, the real federal funds rate has averaged about 100bps lower than the pace of real GDP growth, and theory suggests that the equilibrium values for these two measures should move in tandem on a one-for-one basis. Thus, if trend real GDP growth is just about 2%, as many economists and policymakers presume, then the equilibrium real federal funds rate should be a little less than 1%. Assuming inflation eventually returns to target (2.0%), historical relationships would suggest that neutrality could be as high as 3%. Thus, the FOMC will need to march past this and keep going further into restrictive territory. We continue to look for three additional hikes later this year: +50bps in September, +25bps in November and +25bps in December, bring the year-end funds rate range to 3.25-3.50%. In early 2023, we expect another 50bps of tightening to 3.75-4.00% by the end of Q1

 

RBC: we still see 50bps in September (and 50bp and 25bp in November and December, respectively) as the base case, with the upcoming data having to show a retrenchment in inflation and/or very robust job gains or activity to clear the bar for 75bp. We think the camp advocating for a step-down in the pace of hikes with rates now near estimates of neutral is in the majority