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Welcome back. A holiday shortened trading week kicked off yesterday with FOMC minutes and will finish with a G20 meeting and the jobs report on Friday. Yesterday, the Fed released minutes of its Federal Open Market Committee meeting from June 13-14.

We know the Fed raised its fed funds target rate for a second time this year to a range of 1 percent to 1.25 percent, while describing monetary policy as “accommodative” in their statement. They reiterated their support for continued gradual rate increases. Beyond that, the Fed was divided on the timing of when to begin shrinking its massive balance sheet.

Fed officials updated their balance-sheet policy in the gathering, laying out a path of gradual reductions with caps. The central bank wants to start winding down the $4.5 trillion bond portfolio without roiling longer-term interest rates, while gradually raising the policy rate. The minutes indicated that the committee wants to begin the balance-sheet process this year, maybe within a couple of months – without naming an exact date.

The Fed said in June it would runoff maturing principal payments on Treasuries initially at $6 billion per month, increasing by $6 billion every three months over 12 months, until it reaches $30 billion. For agency and mortgage-backed securities debt, the cap starts at $4 billion, and rises by $4 billion every three months until it hits a $20 billion a month.

The minutes said, “several participants endorsed a policy approach” where the labor market would undershoot their estimate of full employment “for a sustained period.” Meanwhile, several other participants “expressed concern that a substantial and sustained unemployment undershooting might make the economy more likely to experience financial instability or could lead to a sharp rise in inflation.”

Financial conditions were also debated at the meeting, with some participants arguing that “increased risk tolerance” among investors could be lifting asset prices. A few others expressed concern that “subdued market volatility” could lead to financial stability risks.

The minutes showed Washington political gridlock is also starting to creep into the outlook of the Fed’s business contacts. “Some large firms indicated that they had curtailed their capital spending, in part because of uncertainty about changes in fiscal and other government policies.”

Factory orders sank 0.8% in May following a smaller decline in April. Factory orders were up 4.8 percent from a year ago. Activity is slowing against the backdrop of a moderation in oil prices and declining motor vehicle sales. Motor vehicle manufacturers reported on Monday that auto sales fell in June for a fourth straight month, leading to a further increase in inventories, which could weigh on vehicle production.

Nationally, home prices rose 6.6% compared...


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