Bullish Signs From Fed Officials. Yesterday, the Fed released the minutes for the FOMC meeting which happened in January 30-31. This was Janet Yellen’s final meeting at the Fed.
The minutes showed that committee members were confident about the economy. They showed that some members were confident that the economy was growing much faster than when they met previously. Other members were confident that inflation was likely to reach their target of 2.0% later this year.
The committee members appeared bullish on the US economy arguing that increased business and consumer confidence was likely to spur more spending. In addition, the tax cuts enforced by President Trump were likely to help fuel the economy to new heights at least temporarily.
Initially, investors were pleased with the minutes. A few minutes after they came out, investors pushed the main indices to new intraday highs. The dollar index continued to soar. All this happened because investors were optimistic that the Fed would initiate a more aggressive rate hike plan. The Dow, S&P, and the NASDAQ all reached an intraday high of $25,248, $2746, and $7335 respectively while the dollar index reached 90.
All this was short lived. While investors welcomed the new minutes, they later believed that they would not impact the current trend in Fed rate hikes. By close of business, the Dow, the S&P and the NASDAQ were lower by 0.67%, 0.55%, and 0.22% respectively.
At the same time, government bonds sold off with the 10-year treasury yields falling to 2.943% from 2.895%.
The minutes increased the odds that the Fed will raise interest rates in March. In January, they left rates unchanged and pointed towards three hikes later this year. Since 2015, the Fed has raised rates three times as they move towards normalizing rates.
In December, inflation, excluding food and energy categories rose 1.5% from a year earlier. In the last meeting, they predicted that inflation would rise notably higher in 2018. They estimated that it would reach their target of 2% later this year or early next year.
A lot has happened since December. First, Donald Trump signed into law a new tax regime which has reduced the corporate and individual taxes. Companies will now pay a reduced tax of 22% down from 35% a year earlier. A month ago, congress approved a higher than expected spending package. While this package will lead to more deficits in the long term, in the short term it could lead to increased capital spending.
There is a lot to be hopeful for. For example, economists believe that the unemployment rate will continue to go down. Some, like those in UBS and JP Morgan believe that the rate could fall to 3.2%, which is the lowest level in 65 years. This is a level one percentage above where the Fed officials believe is sustainable in the long run. When it reaches such a position, officials are likely to increase hikes to prevent what is known as a hard landing.
The bottom line is, if the Fed officials believe that the economy is moving on as planned, they will likely leave their plans for three hikes unchanged. If they feel that the economy is doing better than expected, they may increase the pace for rate increases.