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FOMC minutes reveal a hawkish bias

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The Federal Reserve Bank released its monetary policy minutes from the meeting that was held in March this year. The central bank had hiked interest rates by 25 basis points which was widely anticipated. At the meeting, central bank officials stuck to the baseline scenario of sticking with three rates hikes in 2018.

Following the March rate hike, investors were expecting the Federal Reserve to hike three more times during the year. The next Fed meeting is scheduled for May 2, 2018.

This view was widely maintained as over the weeks after the central bank meeting, with the exception of some officials with hawkish bias maintaining that the central bank will keep hiking rates at a gradual pace.

Even the Federal Reserve Governor, Jerome Powell did not offer much insight into the Fed’s policy during his speech just a week before. The markets were expecting the Fed minutes to reveal a similar stance.

However, released last Wednesday, the FOMC minutes reveal a hawkish bias that is growing among officials.

All of the policy makers felt that the U.S. economy would continue to strengthen and expect inflation to rise in the coming months as well. Officials, according to the Fed minutes were unanimous in their decision to hike interest rates at the meeting in March.

“Participants generally saw the news on spending and the labor market over the past few quarters as being consistent with continued above-trend growth and a further strengthening in labor markets,” the meeting minutes said.


Expressing the views on inflation, the minutes showed that “With regard to the medium-term outlook for monetary policy, all participants saw some further firming of the stance of monetary policy as likely to be warranted.”

Moreover, officials were of the same view that the U.S. administration’s trade and fiscal policies, although creating uncertainty would benefit the U.S. economy.

Policy makers expected that consumer prices will firm in the coming twelve months. The Trump administration’s trade policies were also widely discussed. Many officials believed at the time that the trade policies would trigger retaliatory measures by the trading partners.

Officials were also optimistic that the U.S. economic outlook had strengthened in recent quarters.

The minutes revealed that there were downside risks to the Fed’s monetary policy, which primarily comes from the uncertainty due to the trade talks. However, excluding this factor, officials expressed optimism that consumer prices could start to rise faster than expected.

This could potentially spur officials to hike rates at a faster pace.

FOMC minutes reveal a hawkish bias 1
FOMC Meeting, May 2018: > 96% probability for 25 basis point rate hike. Source: CME Group

Ahead of the FOMC meeting minutes release schedule, the monthly consumer price index data was released. According to data from the labor department, headline inflation had eased, falling 0.1% on the month.

However, on an annual basis, headline CPI was seen rising 2.4% on the year. Core CPI which excludes the volatile food and energy prices also firmed, rising 0.2% on the month and this pushed the annual core CPI to 2.1%.

The Federal Reserve, which looks at the core PCE data as a measure of inflation was also seen firming in recent months. Although still below the Fed’s 2% inflation target rate, the underlying inflationary pressures were seem to be building rather strongly.

Supporting this view was the fact that earlier in the week, the producer price index data showed continued pressures in prices paid at the factory gate. Headline PPI was seen rising 3% on the year and this increase is expected to be eventually passed on to the consumer.

Following the FOMC meeting minutes, the U.S. dollar briefly strengthened but soon gave back the gains as the broader uncertainty due to the geo-political developments continued to weigh on the markets.



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