FOMC stay the course as uncertainty grows - Westpac

Elliot Clarke, Research Analyst at Westpac, suggests that in the minutes of the July/August FOMC meeting, there was a clear intent to carry on with the gradual normalisation of the Fed Funds Rate for now.

Key Quotes

“Practically speaking, this means a hike once per quarter, with the next move ‘due’ in September. That said, the members’ judgement that “the risks to the economic outlook appeared roughly balanced” masks a growing array of downside risks for growth that will require a change of course in 12 months.”

“For business, the Committee’s ongoing concerns over the potential impact of trade tensions on investment and business sentiment were clear.”

“On household demand, a shift in expectations around housing is the most significant emerging risk.”

“Albeit more vague, increased apprehension amongst the Committee members over the potential benefit the US economy will receive from fiscal stimulus through 2018 and 2019 is also worth monitoring, having been a key support of the FOMC’s positive view.”

“In contrast to the activity discussion, the commentary for inflation spoke more of (contained) upside risks. Having disappointed through this cycle, consumer inflation now sits “near 2 percent” – the FOMC’s medium-term target.”

“Given this starting point, labour market strength, and robust consumption momentum, it is clear inflation could easily print above target for a time – particularly as rising tariffs increase input costs for many firms. It is fair to say however that there remains little concern amongst the Committee of a sustained ‘inflation breakout’, and hence a need to accelerate the pace of tightening.”

“While we see a window for four further hikes from September 2018 to June 2019, we expect a sharp slowdown in growth to trend thereafter will preclude any further rate hikes.”

“Instead, rates on hold through late-2019 and 2020 seems the most appropriate course of action, particularly given the fiscal stimulus unwind from October 2019 will take considerable time to assess. Over this period, trade tensions are also likely to remain a headwind for the US economy, particularly investment.”