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FOMC Meeting Minutes Preview – May 2019

Will trade wars and inflation concerns spring a surprise in the Fed minutes?

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On Wednesday, the US Federal Reserve will be releasing the minutes of their early May monetary policy meeting. The release will be one of the key highlights on the economic docket this week.

Amid rising tensions and the uncertainty surrounding the impact of the global trade wars, investors will look to the FOMC meeting minutes. The minutes could show if the escalating tensions reverberate into potential changes to monetary policy.

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The FOMC kept the interest rates unchanged at 2.25% at the May meeting.

Fed Funds Rate
Fed Funds Rate

Probability of a Rate Cut Rises to 73% for December 2019

Given the fact that the FOMC meeting minutes cover the early May policy meeting, it could be a bit outdated. But in recent weeks, various members of the FOMC’s policy-making committee have expressed concerns.

Fed Presidents from regional central banks such as Boston, Richmond, and Minneapolis have expressed concern regarding the economic impact of the trade wars. The markets continue to steadily price in a possible rate cut later this year.

At the time of writing, the Fed funds futures probability shows a 51% chance of a rate cut in September. And the odds are rising to 73% for a rate cut in December this year.

CME Futures
CME Futures, Fed Funds Rate Probability

Trade Wars Will Likely Dictate the Fed’s Policy

The prospects for a rate cut come as the initial effects of the Trump administration tax cuts start to fade. The increase in import prices on goods imported from China could dent consumer spending. The 25% hike in tariffs on additional goods imported from China could also see a surge in consumer prices rising steadily over the course of the year.

Officials in Washington have also ratcheted the rhetoric on automobile imports from the eurozone. Recent comments from President Trump that the EU was worse than China indicates the next phase in the trade war escalation.

US Economy Maintains Growth, but GDP Could Slow

Meanwhile, the only bright spot for the US economy has been robust consumer growth. As seen a few weeks ago, the first quarter GDP grew stronger than expected. But this robust momentum is unlikely to continue amid the current backdrop.

Recent reports show that retail sales spending retreated after peaking from the highs in March. The US labor market continues to remain the cornerstone of economic growth. The unemployment rate fell to fresh historical lows as of April 2019.

Inflation Remains the Dominant Theme

At the May monetary policy meeting, Fed officials called the current weak inflation growth transitory. There were also talks about the Fed shifting to a more average view of inflation target over a time period.

This means that Fed officials could allow inflation to rise above the 2% target rate for a period of time to compensate for the prolonged weakness in consumer prices.

The minutes, as a result, could indicate how committed officials are to this potential shift in policy.

Last week, Fed Governor Lael Brainard gave opposing views to the general Fed statement. She said that the current weakness in consumer prices might not be due to slack in the labor market.

Brainard cautioned that the weakness in consumer prices could leave little room for the Fed to steer its monetary policy.

The next main monetary policy meeting is due in June. This will also include the Fed’s quarterly economic projections and dot plot. The Fed’s dot plot gives an estimate of where policy makers think interest rates will be over the course of the year.

As a result, investors will be looking to the Fed minutes to see whether there will be any shift to the forward guidance. The markets pricing in a rate cut is in contrast to the Fed’s view of interest rates staying steady. As a result, here is a good chance of a possible shift in expectations, either from the Fed or from the markets.

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