Analysts at Rabobank note that the yesterday’s FOMC minutes show that we are still going to see a hike in September unless the economy suddenly falls over as “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.”
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“Worryingly, the risk of inverting the yield curve was also debated, with several doves citing statistical evidence that yield curve inversions have often preceded recessions. However, other participants (hawks) emphasized that downward pressure on term premiums from central bank asset purchase programs and the strong worldwide demand for safe assets made this time different.”
“In other words, many in the FOMC aren’t listening to the market saying “Stop!!“ Is that bullish? Our Fed watcher Philip Marey admits that his forecast of a total of three hikes for this year has become increasingly challenged: while the June dot plot revealed a delicate 8-7 balance of the dot plot in favour of four instead of three hikes this year, the strength of economic data for Q2 and Q3 may be shifting that balance in favour of four hikes in the next dot plot, in September.”
“For now, he is sticking to his forecast of three hikes this year, but if the trade conflicts do not escalate much further a fourth hike becomes more likely.”
“Unfortunately, that would also get us closer to a recession. In fact, Rabo’s calculations published suggest that June’s FOMC projections are a blueprint for a monetary policy mistake.”
“Before the end of 2019, by the fifth hike from now, the Fed would invert the yield curve, and that could signal a recession in early 2021. So this bull market might not have to die of its own dialectic/internal contradictions after all.”
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