Minutes of the United State of America Federal Reserve Bank last meeting released Wednesday signalled broad support for another interest-rate hike in September with the economy growing strongly, but also deep concern that a major escalation in ongoing trade disputes could derail the economy. This means that many institutional and foreign investors will be pulling out their funds from emerging markets such as Nigeria. Prices of shares may further plunge and subscriptions to treasury bills. Many Fed officials said that if data continue to support their outlook, “it would likely soon be appropriate to take another step in removing policy accommodation,” the minutes said. Fed watchers take that language as support for a move at the next policy meeting, set for late September.
Current market odds are signalling a 96 per cent probability of a rate hike in September and 60 per cent chance of another in December. At the same time, officials said they might have to pause from their gradual rate path if there is an escalation in international trade disputes. Fed officials were unanimous in their view that a trade war represented a major downside risk to the economy. “Most expressed the view that an escalation in international trade disputes was a potentially consequential downside risk for real activity,” the minutes said.
The Trump administration as early as Thursday may level new tariffs on $16 billion worth of Chinese goods as it considers whether to impose levies on another $200 billion worth. Given the complex nature of trade issues “a major trade escalation” presented a challenge in determining the appropriate way to respond, some officials said. At the meeting, Fed officials also agreed they would “fairly soon” need to scrap the language describing their policy stance as “accommodative” because the level of rates is getting closer to neutral.
Federal Reserve officials also had a lengthy discussion about what to do if they are forced to push interest rates back down to zero in the next recession, Officials said there was a “meaningful risk” rates could go back to zero during the next decade. In the wake of the Great Recession, the Fed started buying Treasury’s and mortgage-related assets to get long-term rates down. This policy was controversial and the Fed acknowledged that academics still don’t agree on whether it was effective.
Officials said their toolkit of “forward guidance” and asset purchases was “effective,” but decided to keep talking about alternatives. Economists said Fed Chairman Jerome Powell may elaborate on this issue in his speech Friday in Jackson Hole. Financial conditions have eased over the past month as investors think the Fed may not have to push interest rates into restrictive territory.
