Fed Meeting Minutes Reiterate Gradual Path for Rate Increases

The Federal Reserve Open Market Committee (FOMC) met in June for their monetary policy meeting. The meeting was meant to asses the status of the US economy and the future of its monetary policies. Yesterday, the officials released the minutes for this meeting. These minutes are usually released three weeks after the meeting.

In the minutes released yesterday, the officials continued their upbeat stands about the US economy but pointed to further risks as the country leads in a trade war. They affirmed that they would continue the gradual rate hikes policies they have advocated for in the past. This is despite of the trade war that started early today, the turmoil in the emerging markets – who are struggling to deal with a strong dollar – and the flattening of the yield curve.

There was also a debate about the language of the Fed statement that is released after the meeting. Some officials suggested a change in the language that has in recent meetings been about the Fed being accommodative. Traders follow the language closely because a change in it could be an appropriate indicator as to how the officials will move on with the monetary policy.

On interest rates hikes, the officials said that:

“Participants generally judged that, with the economy already very strong and inflation expected to run at 2 percent on a sustained basis over the medium term, it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer-run level by 2019 or 2020.”

In the meeting, the officials agreed to raise interest rates for the second time. The rates are currently at a medium range of between 1.75% and 2 percent. They also predicted that they would be forced to hike two more times this year. The upbeat nature is because of the US recent rate hike and the increased government spending. The chart below shows the dot plot of how the future rate hikes may look like.

Still, the officials are likely to face a major challenge if recent data is to be believed. Yesterday, data by ADP showed that the economy added 177K people to the workforce in June. This was a major miss from the 190K the analysts were forecasting.

In addition, the trade war started by Donald Trump has just started. In midnight, the US started imposing higher tariffs on Chinese goods. Swiftly, the Chinese announced that they were retaliating against the US tariffs. While models have been created before to show how the tariffs will play out, the reality is that they might not be accurate. Therefore, in the upcoming meetings, traders will be focusing on the data from the US and the statements from the Fed.

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