The Federal Reserve released the May FOMC minutes last week. The minutes were released with the usual delay of three weeks after the monetary policy meeting. According to the meeting minutes, officials had earlier this month suggested that another rate hike was appropriate.
Officials noted that while there were several risks that were facing the U.S. economy such as rising wage pressures and potential threats to global trade on the U.S. administration’s trade policies, the U.S. economy was seen to be fairly healthy.
The May FOMC Minutes from the monetary policy meeting that was held on the 1st and 2nd of the month showed that the policymakers were upbeat about the U.S. economy, noting that the next interest rate hike was “likely soon to be appropriate.” The markets are expecting to see that next rate hike coming in the June FOMC meeting.
The next Fed meeting is scheduled for June 12th and 13th where interest rates could be hiked from the current 1.50% – 1.75% to 1.75% – 2.0%.
Fed officials expressed their optimism about the growth and employment gains that were registered this year. The U.S. unemployment rate was seen falling decade lows of 3.9% as of April and the unemployment rate is expected to remain steady at the current levels for May as well.
There were also talks about the growing number of risks and uncertainties. Most importantly, officials highlighted the fallout from the U.S. administration’s trade policies which could impact not just the United States but the global economy as well.
Within the May FOMC minutes, we can see that officials had left the interest rates unchanged. The FOMC had previously raised interest rates at the monetary policy in March and signaled that interest rates could rise three times over the year, matching the forecasts given from the December 2017 monetary policy meeting.
However, many economists believe that the Federal Reserve could hike one more time in 2018 bringing the Fed funds rate to 2.25% by the end of this year. The optimistic view comes on the fact that the U.S. economy was supported by a healthy labor market alongside fiscal policies.
A few months ago, the U.S. President Trump announced $1.5 million in tax cuts which was approved by the U.S. Congress in December. This alongside a modest pace of wage growth was expected to put more spending power to the consumers which is expected to push inflation higher.
The Fed’s preferred measure of inflation, the Core PCE price index was seen hovering close to the Fed’s 2% inflation target rate. However, in the May FOMC minutes, officials included that they would tolerate a brief period of inflation overshoot. The minutes called this the “symmetric target” noting that given the amount of time it took the central bank to achieve the 2% inflation target, it was willing to tolerate higher inflation for some time.
Officials from the regional Federal Reserve banks expressed concerns about the effects of the trade tariffs and agreements. According to the officials, this could potentially include companies putting off their capital spending plans which could impact businesses.
The uncertainties are said to potentially offset the tax breaks that U.S. corporations received, which in turn could affect the consumers.
The U.S. administration started off by imposing higher tariffs on steel and aluminum imports while threatening to impose up to $150 billion in tariffs on imports on goods and services from China. However, earlier last week, there were some signs of the heated trade wars cooling down.
The U.S. Treasury secretary Steven Mnuchin said that there was no trade wars for the moment as officials on the both sides welcomed the news and vowed to negotiate mutually beneficial terms.
While this has helped to push the markets briefly higher, later in the week, President Trump expressed doubts on whether the U.S. could achieve such a deal with China. This pushed the markets back down amid concerns that uncertainties would continue.