Here's Something You Didn't Realize the Fed Was Worried About
All of a sudden, the Federal Reserve looks more worried about deflation than anyone had thought.
That's the fast takeaway from minutes of the June meeting of the central bank's monetary policy committee, where members shied away from an interest-rate increase widely expected just weeks earlier.
Records of the meeting released Wednesday show members concerned not only about the creation of just 38,000 new jobs in May -- a fraction of expectations -- but also about new and continuing threats to their efforts to boost core yearly inflation to 2% from the existing level of 1.6%.
The minutes point to downdrafts in international markets, a tapering in demand for inflation-protected Treasuries, some changes in survey-based measures of inflation expectations, and, especially, a decoupling of the traditional relationship between oil prices, which were rising in June after two years of declines, and forward-looking measures of inflation. The minutes say the Fed staff expects inflation to stay below its target until 2018.
The break between oil prices and the market's view of inflation was "a development that contrasted" with a longtime correlation between the two, according to the minutes. It also raises questions about corporate pricing power, with prices of exports dropping (affecting the likes of Nike (NKE) - Get Report ), and complicating prospects for everyone from interest-rate driven banks like JPMorgan Chase (JPM) - Get Report and Bank of America (BAC) - Get Report to oil companies like ExxonMobil (XOM) - Get Report .
Throughout the 12 pages of minutes, the committee's members are shown as rattled by the May jobs report and struggling to figure out how much weight to put on what was, at the time, a single bad month of data.
"Almost all participants judged that the surprisingly weak May employment report increased their uncertainty about the outlook for the labor market," the central bank said in the minutes. "Even so, many remarked that they were reluctant to change their outlook materially based on one economic data release."
May's report was the second in as many months where job gains were below a level of 200,000 that had been the recent norm, and the minutes show members sweating developments like an increase in the number of people forced to take part-time work as well as a dip in industrial-production growth.
Such concerns raise the stakes for the June jobs report scheduled for Friday, which is already one of the most highly anticipated in years.
Some committee members pressed concerns that apparently slowing employment growth combined with weaker business investment indicate the central bank should leave interest rates lower for a longer period of time, an undesirable trend for banks whose interest income has already been pinched by years of that.
The Fed's December increase of 25 basis points, which took short-term rates to a range of 0.25% to 0.5%, was the first since rates were cut to nearly zero during the 2008 financial crisis; the central bank subsequently halved a projection that it might raise rates as many as four times this year.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.