Economic Flash

FOMC Minutes Tee up September Hike, Show Fed Concerned with Prolonged Trade Disputes


by Craig Dismuke, Dudley Carter

FOMC Minutes Tee up September Hike, Show Fed Concerned with Prolonged Trade Disputes


The outlook for monetary policy for the second half of 2018 is fairly clear in the FOMC’s August 1 Meeting Minutes.  Fed officials appear satisfied with the direction of the economy and the stability of inflation near their 2% target; but, are watching several risks as potential disruptors to their gradual-rate-hike plans. Of primary importance for investors, a September rate hike is now fully teed up.  According to the Minutes, many officials believed that “it would likely soon be appropriate to take another step in removing policy accommodation.”  This phrase has been used previously in Minutes preceding rate hikes.  Officials also believed that the Committee’s assessment that monetary policy remains “accommodative” would need to be changed “soon.”

 

As for the economic outlook, participants noted that “the labor market had continued to strengthen and that economic activity had been rising at a strong rate.”  Regarding inflation, participants appear to be more and more satisfied with the current trend and future outlook.  According to the Minutes, “both overall inflation and inflation for items other than food and energy remained near 2 percent on a 12-month basis. A few participants expressed increased confidence that the recent return of inflation to near the Committee’s longer-term 2 percent objective would be sustained.”  However, while most participants appeared to be content with the outlook, “several” officials noted that higher prices on some items affected by tariffs posed a short-term risk to inflation rising. Additionally, “some” were concerned that “a prolonged period in which the economy operated beyond potential could give rise to inflationary pressures.”

 

Perhaps most illuminating was the debate over potential risks to stable growth. Continued trade disputes, housing, and emerging markets were all seen as posing downside risks.  According to the Minutes, “all participants pointed to ongoing trade disagreements and proposed trade measures as an important source of uncertainty and risks.”  Specifically, participants noted risks to “business sentiment, investment spending, and employment, … [a reduction in] the purchasing power of U.S. households, … reductions in productivity and disruptions of supply chains.”

 

One concern about continuing with gradual rate hikes was the continued flattening of the yield curve.  “Several participants cited statistical evidence for the United States that inversions of the yield curve have often preceded recessions. They suggested that policymakers should pay close attention to the slope of the yield curve in assessing the economic and policy outlook.”  Others, however, noted that an inverted yield curve “might not have the significance that the historical record would suggest” because of “global factors … contributing to downward pressure on term premiums, including central bank asset purchase programs and the strong worldwide demand for safe assets.”


July 31-August 1, 2018 Minutes of the Federal Open Market Committee


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