While the Fed has confirmed its commitment to normalising monetary policy, the US Dollar traded lower in response to the release of the latest FOMC meeting minutes which revealed concerns among the rate setting committee. Members of the Federal Reserve Board highlighted their concerns about the potential impact of a global trade war, specifically the affect such a scenario would have on US farmers.
Fed Concerned For Farmers
These comments are particularly important given the developments seen recently with Trump’s announcement of import tariffs on Chinese goods which Beijing then responded to by applying import tariffs on American goods.
In terms of US farmers, the minutes highlighted concerns that have been raised by the farm industry itself regarding Trump’s plans to impose a 25% tariff on imported steel and a 10% tariff on imported aluminium. The minutes showed that “Participants did not see the steel and aluminium tariffs, by themselves, as likely to have a significant effect on the national economic outlook,” “but a strong majority of participants viewed the prospect of retaliatory trade actions by other countries, as well as other issues and uncertainties associated with trade policies, as downside risks for the U.S. economy. Contacts in the agricultural sector reported feeling particularly vulnerable to retaliation.”
Concerns Over Tax Cuts
Alongside concerns regarding US trade policy, members of the committee also raised concerns about the potential economic impact of recently enacted tax cuts as these tax cuts are widely expected to increase the already wide federal budget deficits.
Despite these concerns however, the minute showed that policymakers remain firmly confident in the health of the US economy and the strength of the recovery. Furthermore, the minutes showed that policy makers expect the joint weight of tax cuts signed by the President and a bipartisan congressional deal this year to boost federal spending and amplify economic output over the coming years.
Uncertainty Around Economic Boost
However, there is some uncertainty about the size of the boost to the US economy and when this boost will emerge give that there is barely any precedent for increasing fiscal stimulus while unemployment is so low. Indeed, the minutes revealed that “suggested that uncertainty about whether all elements of the tax cuts would be made permanent, or about the implications of higher budget deficits for fiscal sustainability and real interest rates, represented sources of downside risk to the economic outlook.”
The meeting was notable due to it being the first meeting under new Fed chair Jerome Powell who presided over the decision to raise rates for the sixth time since the end of the Great Depression with rates now in the 1.5% – 1.75% range.
Unanimous Decision To Raise Rates
Regarding the decision to raise interest rates, the minutes showed that “All participants agreed that the outlook for the economy beyond the current quarter had strengthened in recent months”. However, the minutes also noted that “a couple of participants” felt that the Fed would be better served by waiting another meeting before raising rates to allow for more data to be assessed in order to confirm that inflation is indeed on track to meeting the Fed’s 2% target.
In all the meeting was broadly positive, however, concerns about trade wars have obviously taken on a deeper relevance now given the developments over recent weeks and the market will clearly be sensitive to any further developments which will likely be viewed as obstacles to further rate rises by the Fed.
For now, USD remains constrained between support at the 88.72 level which was the broken 2010 high (with the 61.8% retracement from the 2014 lows sitting just beneath) and resistance at the broken supporting trend line. Until one of these technical levels is broken the range will continue.