FOMC minutes: Fed to 'wait and see' for even longer due to Brexit

Little news in the minutes from the June FOMC meeting, which took place just eight days before the UK's EU vote. Most of the information we already got in the FOMC meeting statement and Fed chair Yellen's press conference after the end of the meeting. 

The Fed was already in  a wait and see' mode before the UK's EU vote due to the mixed signals from data (strong pickup in activity growth in Q2 but weak employment growth). With Brexit this is even more true and we think the Fed will 'wait and see' for even longer. 

Market participants agree that the Fed is on hold for now as markets only price in a fifty-fifty chance of a Fed hike before year-end next year. 

The minutes confirm the message Fed chair Janet Yellen sent at the press conference, where she said that a Brexit ' could have consequences ' for the US economic outlook and financial markets developments. The minutes state that the Fed will have to 'wait for additional data regarding labor market conditions as well as information that would allow them to assess the consequences of the U.K. vote for global financial conditions and the U.S. economic outlook '. 

Now that we know the UK voted to 'leave' the EU, we have lowered our growth forecasts for the US economy from 1.9% to 1.7% this year and from 2.3% to 1.9% next year. The reason is that the US economy is not immune to a slowdown in Europe. Hence, we also expect the Fed to be on hold until June 2017 and only to hike twice next year (we expect the following hike in December 2017) . As we have argued for some time, most voting FOMC members have a dovish-to-neutral stance on monetary policy and would rather postpone the second hike than hike prematurely. 

We think the risk to our Fed view is balanced so the next hike could come sooner if the impact of Brexit on the economy is smaller than we currently expect (or later if bigger). 

Otherwise, the FOMC mainly discussed how to interpret the mixed data, especially the weak jobs reports. The minutes state that the FOMC ' discussed a range of interpretations of these data '. ' Many ' FOMC members think that the jobs growth in recent months have been lower than the ' underlying pace ' due to transitory factors as noise and strikes. ' Some ' noted that other labour market indicators have been stronger while also ' some ' thought that it could be ' indicative of a broader slowdown ' in the economy. 

The next important data release is on Friday when the June jobs report is due. Even if we see a rebound after the weak reports in April and May, this would probably not be enough to bring back the Fed hiking theme due to Brexit. The Fed needs data from after Brexit to analyse the impact of Brexit on the economic situation in the US before moving on. Since PCE core inflation is still below 2%, inflation expectations (both survey-based and market-based) have fallen and wage inflation is still subdued, the Fed can afford to stay patient.