- Officials confident that the U.S. economic growth will remain strong
- Members cite concerns due to the impact of trade tariffs on the U.S. economy
- Higher tariffs could result in increased cost of input prices, officials note
- September rate hike expectations remain strong
The U.S. Federal Reserve released its monetary policy meeting minutes last week from the meeting that was held on July 31 – August 1. Officials view that the escalating global trade tensions remained the biggest risk to the U.S. economy which was otherwise considered to be strong.
The meeting minutes indicated that members of the Federal Open Market Committee remained fairly confident about the economic growth in the U.S. which was strong.
The momentum is expected to continue for the near term as well. As a result, officials said that it would be appropriate to take further steps to remove the accommodative monetary policy. This was an indication of another rate hike that is due to come in September.
Officials at the FOMC indicated that the higher trade tariffs imposed by the Washington administration on a wide range of goods could pose risks to the economic growth.
The meeting minutes showed that all participants agreed that the ongoing trade disagreements and the higher tariffs remain an important source of uncertainty. Officials said that if the disputes continue over a large scale and continue to be prolonged, it would have an adverse impact on the business sentiment and outlook. This, in turn, is expected to his other areas such as investment and employment.
Besides the trade tariffs, officials also touched on the aspect of inflation. Members remained divided on the current trend in inflation and how to respond from a monetary policy perspective.
Members noted that the current trend in inflation was toward the central bank’s 2% inflation target goal. But officials noted that some pressures emerged on account of higher tariffs that could increase the cost of input prices.
Regional surveys, according to the Fed showed that businesses were not yet cutting back on investment but that they could cut back on investment if the trade uncertainty was not resolved soon.
“Reports from several Districts suggested that firms had greater scope than in the recent past to raise prices in response to strong demand or increases in input costs, including those associated with tariff increases and recent rises in fuel and freight expenses,” the summary said.
The Fed had previously hiked interest rates to 1.75% – 2.0% at its previous monetary policy meeting in March. Since then, the economic data from the U.S. has remained robust. This warrants another rate hike in September which is widely expected.
Another interesting aspect from the meeting minutes was that officials are likely to remove the term “accommodative” in one of the upcoming meetings. The Fed has so far maintained that it would hike rates at a “gradual” pace.
However, concerns still remain for the moment about what could potentially disrupt the current market conditions.
“Wide-ranging tariff increases would also reduce the purchasing power of U.S. households,” the meeting minutes showed.
The minutes went on to outline the risks by noting: “Further negative effects in such a scenario could include reductions in productivity and disruptions of supply chains. Other downside risks cited included the possibility of a significant weakening in the housing sector, a sharp increase in oil prices, or a severe slowdown in [emerging market economies].”
For the moment, the biggest risk according to the Fed officials remains the impact of the trade tensions which could impact the pace of rate hikes.
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