The transcript of the latest meeting of the Fed’s rate-setting committee (“FOMC minutes“), published yesterday during the European evening, basically confirms the view prevalent among financial-market participants that Team Powell is set to remain on its rate-hike path. FOMC members went on record as saying that a further key-rate move will be appropriate if economic data are in keeping with the monetary authorities’ assessments. There were also indications in the new set of minutes that the Fed will adhere to its gradual rate-hike trajectory in the medium term, i.e. beyond the September horizon, in view of the strong economic development, the resilience of the labour market and the fact that the inflation rate is hovering near the official target. Not least, the Fed’s top echelons have held out the prospect of an adjustment to their forward guidance for monetary policy, arguing that further tightening steps would soon mean that it was no longer appropriate to describe the monetary-policy stance as being accommodative.
Fed funds futures rates imply a more than 90 percent probability of the target range being lifted by 25 basis points to 2.0-2.25 percent at the September meeting. On the other hand, financial-market actors are distinctly more sceptical than the Fed regarding further key-rate increases. This may be connected with the geopolitical risks which are looming. The new minutes reveal that the FOMC too has been keenly debating the upside and downside risks to the economic outlook. Virtually all participants regard the enduring trade conflict as being the biggest risk.
In view of the fact that a whole range of fundamental data are currently painting a positive picture of the US economy and that both headline and core inflation rates are close to the Fed’s target, we are sticking to our forecast that the monetary reins will be tightened on two further occasions over the remainder of the year. The criticism voiced by US President Trump that the Fed would be endangering “his“ economic upswing by implementing further rate hikes will make hardly any difference here. Without any doubt, such criticism rather tends to add to the pressure on Fed Chairman Powell to follow through. After all, Powell is well aware that it would inflict immense damage on the Federal Reserve’s credibility if the markets were to perceive him as being the US President’s “yes man.” It can therefore be assumed that Chair Powell will map out the further normalisation of monetary policy, and ignore Trump’s criticism, in his Friday speech at Jackson Hole.