FOMC Minutes: June is done deal, done for the year? - Rabobank

Philip Marey, Senior US Strategist at Rabobank, explains that the minutes of the FOMC meeting on May 2-3 confirmed that the Committee is aiming for a June rate hike which seems to be a done deal for now.

Key Quotes

“In fact, a couple of participants indicated that a hike at the May meeting was warranted by their economic outlook, but they also noted that maintaining the current policy stance for now would be consistent with the FOMC’s gradual approach or that recent communications by the Committee had not pointed to an increase at this meeting. Most participants judged that if economic information came in about in line with their expectations, it would soon be appropriate for the Committee to take another step in removing some policy accommodation.”

“Members generally judged that it would be prudent to await additional evidence indicating that the recent slowdown in the pace of economic activity had been transitory before taking another step in removing accommodation. In other words, if we get a decent nonfarm payrolls growth figure for May – following the rebound in April that became apparent a few days after the May meeting – and if nowcasts of Q2 GDP growth point to a reacceleration of the broader economy, the Fed is likely to hike in June.”

“Nearly all policymakers expressed a favorable view of a gradual reduction of the Fed’s reinvestments that would entail the announcement of a set of gradually increasing caps on the dollar amounts of securities that would be allowed to run off each month. Nearly all policymakers indicated that as long as the economy and the path of the federal funds rate evolved as currently expected, it likely would be appropriate to begin reducing the Fed’s asset holdings this year.”

“Done for the year?

Since markets have stabilized after the ‘Trumpgate’ turmoil that started on May 9 with the firing of FBI director Comey, we finally shift our call for the second rate hike to June from December. At the same time, recent events in Washington DC support our view that the Fed is not going to hike more than twice this year. As it is becoming increasingly difficult to make fiscal policy, and Trumpgate is likely to continue to hang over the markets like Damocles’ sword, we do not think that the Fed’s intended third hike will materialize this year. Note that this could also delay the Fed’s plan to reduce its reinvestments until next year. From the start we have expressed our doubts about the Trump rally and in particular the anticipated progress on fiscal policy that supported it and events in Washington are increasingly confirming our long held view.”

“What’s more, geopolitical risk has increased in recent months. Meanwhile, we could still see trade conflicts ahead, and the Chinese economy remains a cause for concern as our regular readers will know. What’s more, inflation appears to be losing momentum, despite the low unemployment rate. Finally, if we are right about the Fed getting ahead of itself – not having been able to resist the animal spirits – the correction could be even more painful.”