FOMC Minutes Indicate Further Rate Hikes Ahead
Stock Market Enters Longest Bull Market in History as the Fed Confirms Rate Hike Path.
Longest bull run in the history of the stock market, congratulations America!
— Donald J. Trump (@realDonaldTrump) August 22, 2018
Today, the Federal Reserve released the minutes from its Federal Open Market Committee (FOMC) meeting of July 31 & August 1, 2018. The FOMC minutes indicated that the Fed is intent on continuing to increase interest rates and to reducing its balance sheet. Market participants have placed a high probability on two more rate hikes this year – one in September and one in December. Today’s minutes did little to change that prognostication.
From the FOMC minutes:
“Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation.”
Thus, the Fed appears to be committed to raising interest rates as long as the economy continues to perform at current levels.
In recent months, President Trump has mused publicly that the Fed’s insistence on raising interest rates threatens potentially to choke off economic and stock market gains. In a CNBC Sqawk Box interview on July 19, Trump remarked “I’m not thrilled.” “Because we go up and every time you go up they want to raise rates again. I don’t really — I am not happy about it. But at the same time I’m letting them do what they feel is best.” “But I don’t like all of this work that goes into doing what we’re doing.”
Following Trump’s remarks, Fed Chairman Powell recently assured Senator Tim Scott that the Fed will not be influenced by Trump’s criticism and will continue on its independent path of conducting monetary policy. Powell also noted during a “Marketplace” radio show “We do our work in a strictly nonpolitical way, based on detailed analysis, which we put on the record transparently, and we don’t take political considerations into account.”
The Downside Wild Card – Trade
The FOMC minutes reflected concern regarding the recent trade tensions between the United States and its trading partners as a result of tariffs imposed by the Trump administration. The Fed noted that there was no adverse impact on the U.S. equity markets – yet.
“Concerns regarding international trade policy weighed on market sentiment at times over the intermeeting period, prompting notable declines in some foreign equity markets but leaving only a modest imprint on domestic asset prices on net.”
The Fed noted that tax cuts could have a salubrious impact on the economy and cause their GDP projections to be too low. The FOMC, minutes, however, indicated that the Fed believed that trade policies were a potential drag on the economy and did not outline a scenario where new trade deals could improve future GDP projections.
“The staff viewed the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average of the past 20 years. The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. On the upside, household spending and business investment could expand faster over the next few years than the staff projected, supported in part by the tax cuts enacted last year. On the downside, trade policies could move in a direction that would have significant negative effects on economic growth.”
Indeed, the Fed noted, while there had been no negative impact on the equity markets as a result of trade tensions, that the agricultural sector has been negatively impacted:
“Business contacts in a few Districts reported that uncertainty regarding trade policy had led to some reductions or delays in their investment spending. Nonetheless, a number of participants indicated that most businesses concerned about trade disputes had not yet cut back their capital expenditures or hiring but might do so if trade tensions were not resolved soon. Several participants observed that the agricultural sector had been adversely affected by significant declines in crop and livestock prices over the intermeeting period. A couple of participants noted that this development likely partly flowed from trade tensions.
Several participants commented that increases in the prices of particular goods, such as those induced by the tariff increases, would likely be one source of short-term upward pressure on the inflation rate, although offsetting influences–including the negative effects that trade developments were having on agricultural prices–were also noted.
In addition, all participants pointed to ongoing trade disagreements and proposed trade measures as an important source of uncertainty and risks. Participants observed that if a large-scale and prolonged dispute over trade policies developed, there would likely be adverse effects on business sentiment, investment spending, and employment. ”
None of the participants noted any current positive gains in the economy that could be attributed to recent U.S. trade policies or outlined any scenario where the economy might benefit in the future from a period of prolonged dispute over trade policies.
The current Atlanta Fed GDP now projection for the third quarter is +4.3%, up from 4.1% GDP growth in the second quarter. This indicates that a September rate hike is almost virtually assured absent a dramatic change in the fortunes of the U.S. economy. Federal Reserve Chairman Jerome Powell will speak at the Jackson Hole conference later this week, but few expect his comments to reflect a significant divergence from the economic outlook set forth in the July 31/August 1 FOMC minutes. We may, however, hear further elucidation from Mr. Powell about the Fed’s concerns over trade tensions between the U.S. and its trading partners.
This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.