The Federal Reserve released the minutes for the meeting held on July 31st and August 1st. The minutes were highly anticipated of the recent happenings in the United States. In the past month, the US president has attacked the Fed for increasing interest rates. In his thinking, the Fed is working against his agenda for spurring growth. He has sounded as if he is regretting the appointment of Jerome Powell as the Fed Chair.
The minutes released yesterday showed that the Fed officials were likely to continue the gradual increase in interest rates. An interest rate hike in September is now expected with the odds of a rise at 96%. At the same time, the odds of a rate hike in December has reduced significantly to about 63%.
The minutes also showed divisions among the officials. Some officials such as the Atlanta Fed president, Raphael Bostic have voiced concerns about rate hikes. In an interview on Monday, he said that he would oppose any measures that will invert the yield curve. The yield curve is the difference between short-term treasuries and the long-term ones. In recent months, the yield has flattened the most in more than 10 years and traders expect that more rate hikes will lead to an inversion. An inversion of the yield curve happens when the yield of the two-year is higher than that of the ten-year. Other officials like the Fed chair have not sounded very concerned about the yield curve inversion.
The biggest concerns in the statement was on the impact of the trade war initiated by the United States. The officials said they would wait for data on the impacts. In recent months, the US has moved to place tariffs on imports from major trade partners like the European Union, China, Canada, and Mexico. Last month, the US started a truce with the European Union. Previously, the Trump administration had threatened to impose a 25% on all cars imported from the EU, a move that would be a major blow to the EU. It would also be a major blow to the US, which exports hundreds of thousands of cars including the BMW. This week, the US and China are negotiating a trade deal that will likely be sealed in November when Donald Trump and Xi Jinping are expected to meet. Another positive news this week was about NAFTA. Yesterday, the chief Mexican negotiator on NAFTA said that a deal between the US, Mexico, and Canada was likely to happen soon.
The minutes also showed that future statements may avoid the sentence, ‘the stance of monetary policy remains accommodative.’ This is likely to happen as interest rates rise to a neutral rate. There are also concerns about what the neutral rate is. A neutral rate is a rate that does not accelerate or hinder growth.
The dollar has been one of the best performing currency this year. The dollar index has risen by more than 5%. This has in turn affected the emerging markets that depend on commodities and those that borrowed heavily when interest rates were low.