Beckner: FOMC Minutes Show More Trade Concern; Need to Monitor Yield Curve
Written exclusively for InTouch Capital Markets
6th July 2018
By Steven K. Beckner
Minutes of the June 12-13 Federal Open Market Committee meeting don’t add a lot to our understanding of prevailing monetary policy sentiment among members of the Federal Reserve’s policymaking body. But they do reinforce mounting concerns about trade and, to a lesser extent, the shape of the yield curve.
For now, the consensus is that strengthening economic growth, bolstered by fiscal stimulus, tightening labor markets and inflation “close to 2%,” justify further increases in the federal funds rate from the current 1.75% to 2.0% target, but not aggressively.
The minutes say “participants generally judged that… 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….”
The emphasis again was on raising rates “gradually,” because of “the uncertainty surrounding the level of the federal funds rate in the longer run, the lags with which changes in monetary policy affect the economy, and the potential constraints on adjustments in the target range for the federal funds rate in response to adverse shocks when short-term interest rates are low.”
There was also concern among a few that “inflation expectations were not yet firmly anchored at a level consistent with the Committee’s (2%) objective.”
An uncertainty that was more evident in June was the brewing U.S. trade war with China, the EU and others.
“Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending,” the minutes disclose.
Elsewhere, the minutes say “many District contacts expressed concern about the possible adverse effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity; contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy. Contacts in the steel and aluminum industries expected higher prices as a result of the tariffs on these products but had not planned any new investments to increase capacity. Conditions in the agricultural sector reportedly improved somewhat, but contacts were concerned about the effect of potentially higher tariffs on their exports.”
The latest Fed rate hike, together with the languid behavior of long rates, contributed to a further flattening of the yield curve, and while “a number of factors,” notably lower term premiums, helped explain the phenomenon, the FOMC did have a somewhat anguished disccusion of the matter. In the end, “a number of participants thought it would be important to continue to monitor the slope of the yield curve, given the historical regularity that an inverted yield curve has indicated an increased risk of recession in the United States.”
For now the FOMC remains on track for at least one, perhaps two more rate hikes this year, but the minutes leave open the possibility that risks could alter the funds rate trajectory.