The Fed remains very satisfied by the fundamental conditions and economic growth, as can be seen from the minutes of the last FOMC meeting, according to which the labour market, consumer spending, and industrial production have all reported sound growth. Despite the hurricane-induced disruption, economic output has risen at a solid rate. Gross domestic product is now growing faster than the production potential and inflation has been braked by temporary or idiosyncratic factors. The minutes reflect differences of opinion on the medium-term inflation trend and this sparked a discussion on possible changes to the measures used to secure price stability. On the one hand some FOMC members stated that the Fed runs the danger of waiting too long for inflation to rise and thus exposes itself precisely to the risk of possible instability in the financial markets. On the other hand, some members of the FOMC pointed out that over the course of the year inflation expectations have dwindled. The committee members therefore intend to keep a close eye on inflation trends before making clear adjustments to the degree of monetary policy accommodation.
The FOMC was as a whole somewhat more cautious when judging conditions in the capital market. The Fed’s governors expressed concern that financial market prices are getting out of control and could thus represent a danger to the economy. Stock markets have hit a series of record highs in the course of the year and the rise is, so the FOMC members said, attributable among other things to increased hope that corporate tax rates would be reduced from 35% to 20%. In light of the high valuations for assets and the low volatility in the financial markets, several FOMC members expressed concern that possible financial imbalances may arise. They feared that a sharp correction in asset prices could have a damaging impact on the economy as a whole. In this context, there was also talk of the regulatory changes that had tangibly strengthened capital and liquidity positions in the financial sector. These changes had, the FOMC believed, made the financial system less prone to shocks or sudden market fluctuations.
On balance, further changes to key lending rates thus remain on the agenda. The Fed-Fund-Future’s implicit probability for a rise in key lending rates in December now amounts to 100%. For 2018, only one or two increases to lending rates remain factored into the equation. The programme of reducing the balance sheet looks set to be realised as planned. We expect the key lending rate to be raised in December and then two further adjustments to be made in the course of 2018.