Fed Minutes Reaffirm Gradual Rate Path as Trade Risks Rise

(Bloomberg) -- Federal Reserve officials reaffirmed their commitment to gradually raising the benchmark lending rate amid rising risks from trade battles and emerging-market turmoil that could blunt the tailwind from fiscal policy.

The minutes of the Federal Open Market Committee’s June 12-13 gathering in Washington, released Thursday, also highlighted a debate among policy makers over how many more rate increases would be needed to keep the economy on a stable footing in the long run. A “number” of officials said it might “soon be appropriate” to modify language in the Fed’s post-meeting statement language that describes rates as “accommodative,” according to the minutes.

“Participants generally judged that, with the economy already very strong and inflation expected to run at 2 percent on a sustained basis over the medium term, it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer-run level by 2019 or 2020,” the minutes said.

Stocks remained higher and Treasury yields were little changed after the release of the minutes.

At the Fed meeting, officials unanimously raised the main lending rate for the second time in 2018 -- to a target range of 1.75 percent to 2 percent -- and lifted their median projection to a total of four hikes this year, from three estimated in March.

U.S. central bankers are trying to keep the economy on a sustainable path as growth gets a boost from tax cuts and additional government spending, with a “few” Fed officials saying in the minutes that fiscal policy “posed an upside risk” to the outlook. At the same time, they’re watching closely for signs that an escalating trade war is damping business investment, the biggest contributor to growth in the first quarter.

‘Negative Effects’

“Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending,” the minutes said.

The U.S. has imposed tariffs on imported steel and aluminum and threatened to slap more levies on other products from some of its biggest trading partners, particularly China and the European Union. All have vowed to retaliate in what would amount to a trade war that could raise prices and slow the global expansion.

Despite those risks, “the economy is doing very well,” as Chairman Jerome Powell told reporters after the decision. He said the following week that, in principle, “changes in trade policy could cause us to have to question the outlook,” adding that business contacts were telling the Fed it might be a reason to delay investment or hiring.

Unemployment was 3.8 percent in May, matching the lows since the late 1960s, and the Fed’s preferred gauge of consumer prices rose 2.3 percent on annual basis in May. Officials have said they will tolerate a slight overshoot to bolster inflation expectations after years of being under the target.

The minutes said U.S. central bankers debated the amount of labor-market slack left in the economy, with “several” participants saying “there was further scope for a strong labor market to continue to draw individuals into the workforce.”

Overheating Risks

Officials also discussed risks of inflation, with “a number” of them saying it was “premature to conclude that the committee had achieved” its 2 percent inflation target on a sustainable basis. Others voiced the concern that “a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn.”

Political and economic turmoil in some parts of Europe and emerging-market economies were also cited as a downside risk to growth and inflation by “many” Fed officials.

Most analyst projections show economic growth accelerated in the second quarter after a 2 percent annualized pace in the first three months of the year.

The Atlanta Fed’s GDPNow tracker put the rate of expansion last quarter at 4.1 percent, while the median estimate of economists surveyed by Bloomberg is for 2.9 percent for the full year. Many economists expect growth to cool starting in the current quarter from its pace in the April-June period.

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