The Federal Reserve released the minutes of its latest meeting. According to analysts from Rabobank, they did not set off fireworks in the financial markets and they see their forecast of 3 hikes for 2018 increasingly challenged.
Key Quotes:
“The minutes of the July 31-August 1 meeting of the FOMC did not set off fireworks in the financial markets. The next rate hike in September was signalled by the phrase ‘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.’ However, markets were already convinced that it was a done deal after the hawkish FOMC statement that was released immediately after the meeting on August 1 with an upgrade of the Fed’s assessment of economic growth to ‘strong’ from ‘solid’, and Powell’s failed attempt to get ‘for now’ included in the statement. The latter qualification had been introduced by Powell during his testimony to Congress and was interpreted as underlining that the Fed is not on autopilot now that the neutral policy rate is coming in sight.”
“The FOMC debated the upside risks from stronger underlying momentum in the US economy and downside risks from a possible escalation in international trade conflicts, a significant weakening in the US housing sector, a sharp increase in oil prices, or a severe slowdown in emerging economies.”
“The minutes did not reveal much unease concerning the federal funds rate moving above the midpoint of the target range despite the ‘technical adjustment’ to the IOER in June in the form of a 20 bps rise instead of matching the 25 bps fed funds rate hike. Therefore, the September hike in the target range for the federal funds rate is likely to be a full one, i.e. to be accompanied by a 25 bps rise in the IOER.”
“Our forecast of 3 hikes for this year has become increasingly challenged. While the June dot plot revealed a delicate 8-7 balance of the dot plot in favor of 4 instead of 3 hikes this year, the strength of economic data for Q2 and Q3 may be shifting that balance in favor of 4 hikes in the next dot plot, in September. For now, we stick to our forecast of 3 hikes this year, but if the trade conflicts do not escalate much further a 4th hike becomes more likely.”
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