(Reuters) - U.S. central bankers discussed whether recession lurked around the corner and expressed concerns global trade tensions could hit an economy that by most measures looked strong, minutes of the Federal Reserve’s last policy meeting on June 12-13 released on Thursday showed.
The minutes, which described a meeting in with the Fed raised interest rates for the second time this year, also suggested policymakers might soon signal that the Fed’s rate hiking cycle was advanced enough that policy was no longer boosting nor constraining the economy.
** Fed policymakers discussed flattening of yield curve
** Most Fed policymakers said trade policy risks had intensified and were concerning
** A number of Fed policymakers said might soon be appropriate to change part of policy statement that refers to policy being accommodative
** Many policymakers said gradual hikes could take fed funds rate above neutral level some time next year
ELLIS PHIFER, SENIOR MARKET STRATEGIST, RAYMOND JAMES, MEMPHIS
“It’s not surprising they discussed the yield curve in the minutes. Some Fed officials have said they didn’t want more rate hikes to cause the inversion of the yield curve. If a trade war happens and the economy takes a dive, they might back off. If trade war talk dies down and there are some trade deals, they would continue to hike. They see the underlying economy is strong enough in keeping the yield curve from inverting. The rest of the minutes didn’t contain a lot surprises.”
PUTRI PASCUALY, PORTFOLIO MANAGER AND SENIOR CREDIT STRATEGIST, PACIFIC ALTERNATIVE ASSET MANAGEMENT CO, IRVINE, CALIF.
“From the Federal Reserve’s perspective, given the strength in the growth numbers and labor market, they will do two more rate hikes this year. They see moderate, gradual increases of interest rates, so ‘steady as she goes’ is the name of the game. The trade threat is the prime risk factor so Fed officials are going to monitor how it affects business, investment and overall confidence. Are businesses going to put plans on hold? Will be a question they will be asking.”
MIKE TERWILLIGER, PORTFOLIO MANAGER, RESOURCE CREDIT INCOME FUND, NEW YORK
“There are certainly a handful of notable takeaways from today’s Fed release - including acknowledgment of slowing emerging markets, political uncertainty in Italy as well as questions about the ‘signal’ of a flattening curve. However, the biggest news on a monetary front happened away from today’s minutes.
“The Fed had largely been viewed as sacrosanct, rarely drawing comments, let alone criticism, from elected officials. Economic adviser Lawrence Kudlow’s comments last week, guiding the Fed to move ‘very slowly,’ may represent an opening salvo in what could become a full-on assault on the Fed. The current path for hikes, as confirmed in today’s minutes, suggest that the Fed’s normalization is on a collision course for the 2020 presidential election. Should hiking meaningfully slow the economy, the Fed could find itself directly targeted by President Trump.”
JIM VOGEL, INTEREST RATES STRATEGIST, FTN FINANCIAL, MEMPHIS
“The initial review of this afternoon’s minutes answers the continuing Fed question: Is the FOMC worried enough about economic improvement to accelerate rate changes? A glance at calm interest rates after their release agrees the answer is “no.” The minutes have pushed 2-yr and 3-yr UST back near their overnight highs, but have left the long end untouched.”
“The FOMC “generally judged that, with the economy already very strong and inflation expected to run at 2 percent on a sustained basis over the medium term, it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer run level by 2019 or 2020.”
JONATHAN COHN, INTEREST RATE STRATEGIST, CREDIT SUISSE, NEW YORK
“The minutes echoed what we heard in the press conference last month...There’s still not a whole lot of clarity on whether rates should go beyond estimates of neutral.”
IAN LYNGEN, HEAD OF U.S. INTEREST RATES STRATEGY, BMO CAPITAL MARKETS, NEW YORK
“It’s like the Fed threw a minutes and no one came.”
“They mentioned removing the ‘remain accommodative’ language. That was to be expected… There’s a higher bar to stop normalizing than there would be to stop truly tightening. The fed could more easily craft a market narrative to take them off their 25 basis point-per-quarter tightening campaign.”
“If the FOMC was not worried about a trade war, that would be a concern. But they are worried.”
MARK LUSCHINI, CHIEF INVESTMENT STRATEGIST, JANNEY MONTGOMERY SCOTT, PHILADELPHIA
“There’s an acknowledgement that the trade affairs are in the frontal lobe of monetary officials. At the same time they’re acknowledging the strength of the U.S. economy warrants continuing to raise interest rates even in spite of what could be a threat that trade does metastasize into something that has a more lasting economic impact.”
“They’re struggling with whether to as yet remove the term accommodation...at this point with the yield curve having further flattened, we’re inching closer to where we’re just a rate hike away from a flat yield curve.”
“I think that’s having an influence. The interpretation might be that the Fed’s ‘put,’ if you will, seems to be evaporating...they’re focused on their job which is going to require them to continue to raise interest rates until the data from the impact from the tariffs leads them to act otherwise. So I think the hurdle for any kind of pause in the rate hike cycle is quite high, and investors are realizing that.”
BOB MILLER, HEAD OF U.S. MULTI-SECTOR FIXED INCOME, BLACKROCK, NEW YORK
“At the level of macro risks to the economy, some U.S. trade policy proposals have made their way into the FOMC’s discussions, although the lack of clarity over breadth and magnitude of trade actions makes it nearly impossible to forecast the economic impact. Nonetheless, we anticipate that this will be a topic of regular discussion going forward as trade implications become clearer and as both influences on prices and sentiment work their way through the economy.”
“Finally, the minutes indicated Chair Powell will hold a press conference at every meeting beginning in 2019, which provides additional flexibility to the FOMC in that any meeting could indeed be ‘live’ in terms of policy rate adjustment, or other policy change. While the market may now refine the expected timing of policy adjustments, we do not think this innovation implies any change to the current guidance with respect to the overall path for monetary policy.”
STEPHEN MASSOCCA, SENIOR VICE PRESIDENT, WEDBUSH SECURITIES, SAN FRANCISCO
“I didn’t see anything particularly newsworthy there, I didn’t see anything that was different than expectations and that is what moves markets.
“Trump has built up a lot of goodwill in terms of there is no arguing that unemployment is very, very good, GDP growth is very, very good, a lot of these economic numbers have been exceptional so presumably he has some house money to play with. But they talked about they are concerned with that and it is a valid concern, it is a bit of a gamble here, you are going to take some short-term pain hoping you can ultimately change trade policy. If you don’t, how far down this rabbit hole do you go?
“If the economy stays like it is today, they will go ahead and raise in September. They talked about business investment and it is a valid concern – why is someone going to invest in a business if they think there are going to be tariffs out of the market. If they want a damper on the party that is doing it for them and they may hold off based on how ugly that gets. I don’t think you can look at this meeting and draw any conclusions from it because you have to see where we are in two or three months in terms of economic well-being because clearly they are going to respond. If all of a sudden numbers start falling off a cliff in late August or early September, I doubt they will raise rates, they will take a pass. It is kind of a meaningless event which is why the market has done nothing, it doesn’t tell you anything.”
SAM BULLARD, SENIOR ECONOMIST, WELLS FARGO SECURITIES, CHARLOTTE, NORTH CAROLINA
“From an economic standpoint, it’s consistent with what we are seeing. The U.S. economy is hitting on all cylinders. We are looking at the second quarter consistent with a 4.5 percent growth rate. It’s pretty broad based after a soft first quarter. There are a lot of positives with what’s going on right now. But this pace is not sustainable. We are looking at closer to 3 percent in the second half of the year, which is still higher than what we had seen. With the imposition of the trade tariffs, they haven’t shown up in the business activity data so far. They might show up in the second half of the year.
“They still have risks as balanced. In June when they hiked rates, upped their economic outlook and marked up the number of rate hikes to four for this year, they see the economy as half full even with risks from tariffs.
“How does the yield curve look may play a role with each future rate move. As the curve continues to flatten, those concerns will be there for Fed officials.”
MICHAEL O’ROURKE, CHIEF MARKET STRATEGIST, JONESTRADING, GREENWICH, CONNECTICUT
“Obviously that was a hawkish meeting ... The market’s expectation always was that when we get back to neutral the Fed would stop raising rates. That’s the type of statement that will spook investors knowing the Fed may tighten beyond the neutral level. It’s not a big surprise but you don’t often hear them state it.”
“Are we looking at four to five more rate hikes here? That’s what investors are trying to figure out.”
STOCKS: S&P 500 .SPX ticked up slightly then gave up some gains to stand up 0.48 percent
BONDS: U.S. Treasury yields slipped; 2s US2YT=RR were last at 2.5486 pct; 10s US10YT=RR at 2.8309 pct
FOREX: The U.S. dollar index .DXY was off 0.21 percent, slightly weaker than before the Fed release