US central bank remains optimistic about growth – but the risks are increasing

The minutes of the last meeting of the US central bank’s Federal Open Market Committee on 20-21 March suggest the Fed will adopt a tighter monetary policy stance: the improved outlook for economic growth and the increased confidence that inflation will rise to 2% pave the way for a steeper rate-hiking path. In addition, the tax breaks decided towards the end of last year could further stoke the pace of economic growth. Against this background the FOMC no doubt also discussed the possibility of adjusting the Fed communiqué in the course of the year in order to prepare the markets for an accommodative or even a more restrictive monetary policy orientation. Despite the better economic outlook a large majority of the monetary policy makers expressed concern that a possible escalation of the recent trade dispute would damage the US economy. The FOMC believes the high volatility in the financial markets reflects the uncertainty about future foreign trade policy and the resultant consequences for economic growth.

To sum up, the minutes confirm that the US central bank wants to raise key rates this year and next year. In our view, however, too much importance should not be attached to this assessment as the aforementioned elements of uncertainty for the US economy have tended to be exacerbated since the last FOMC meeting. This applies especially to the political risks such as the threat of a trade dispute with China and the latest sabre rattling in the Syrian conflict. While the possible repercussions of these risks on the US economy cannot be assessed as yet, in our view the uncertainty in this respect argues for a continuation of the gradual key-rate hiking cycle in the course of this year.


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