Fed Minutes May Give Clues Into Fed 2019 Monetary Policy

Fed signaled two rate hikes for 2019

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The FOMC meeting minutes come out this week on Wednesday. The minutes cover the Fed monetary policy meeting from late December. The central bank hiked interest rates by a quarter point bringing the Fed funds rates from 2.25% to 2.50%.

The December rate hike marked the fourth interest rate hike in 2018. The Fed raised rates despite pressure from U.S. President Trump who has repeatedly been critical of the Fed’s rate hikes.

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The meeting minutes will open the deliberations by the policymakers on the future path of rate hikes. At the December meeting, the central bank noted that there could be up to two rate hikes in 2019. However, officials maintained that the pace of rate hikes would depend on the economy.

Recent signs of inflation easing have raised concerns. The market estimates for the first quarter currently point to no rate hikes at least until March 2019.

The probability for a March 2019 rate hike currently sits well below 5% suggesting that investors expect the Fed to remain on the sidelines in the first quarter of the year.

This will provide enough data for the Fed officials and the markets, in general, to assess how the U.S. economy fared during the fourth quarter of the year. According to the Fed funds probability, the markets are currently pricing in a 48.3% chance that the Fed will raise rates just once this year. However, this stands in contrast to the Fed’s rate projections which indicated two rate hikes over the course of the year.

What about inflation?

Inflation remains a key point for the officials. The recent slump in international crude oil prices indicates that consumer prices might be dipping.

From the Bank of England’s statement where officials expected that consumer prices can ease in the coming months on the back of lower oil prices.

The FOMC meeting minutes comes ahead of the Fed’s first meeting this year. However, interest rates should remain steady in January. Concerns about the recession have also increased worries over the pace of the rate hikes.

Before the December rate hike, the Fed President Jerome Powell indicated that the Fed funds rates are near neutral. This came as the Fed President, just a few weeks prior, indicated that the rates are still a far away off from the neutral level.

Economists blamed this switch in the Fed’s narrative due to pressure from the U.S. President Trump. In fact, during the last week of December, rumors of President Trump threatening to dismiss Jerome Powell from his post as the Fed Chairman raised further concerns.

However, the Treasury Secretary Steve Mnuchin dismissed those rumors to quell the markets. Still, as the Fed minutes come out this week, the guessing game between the markets and the Fed’s policy-making committee continue.

The US economic activity

A pick up in the U.S. economic activity could compel the FOMC to continue with rate hikes this year. That being said, the recent decline in the housing market data where new and existing home sales have remained weak, indicates that higher interest rates are keeping home buyers out of reach from purchasing homes.

The fourth quarter economic data will be coming up in the week ahead and could provide further clues on how the U.S. economy closed the year of 2018. Economic activity in the United States picked up the pace in the second quarter when GDP rose more than 4.0%.

However, since the third quarter, GDP growth eased back below the 4.0% threshold to 3.4% as per the third and final GDP estimates given out a few weeks ago.

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