ref :- The Daily Shot Newsletter in the Wall Street Journal online, by Lev Borodovsky
The obvious potential flaw with reading too much into the minutes of Fed Open Market Committee (FOMC) meetings is that since they're released some weeks after the event there's always a chance that they're slightly out of date. So has anything happened since Aug 1st that might make us doubt that the minutes released yesterday might not still accurately reflect the views of the FOMC 22 days later ? Well, the answer to that is Yes... and No.
Yes, because as we know President Trump has been ratcheting up the pressure on the Fed by complaining about rate rises and the strong dollar that they promote ..... and No, because the markets believe that the Fed will not be bullied and will continue to make monetary policy regardless of attempted political interference. That's why the dollar was on the defensive for a few days as traders absorbed Mr Trump's less-than-subtle observations, and firmed again overnight after the release of the minutes.
Even if you hadn't seen the minutes themselves, from that kind of market reaction you would be able to assume that they revealed that in the light of the strength of the economy, the FOMC had deemed that continuing along the path of gradual but steady rate hikes was the appropriate course of action. That reinforces the already very strong likelihood of two more rate increases this year, which would necessitate a hike next month ..... and the probability of that happening has risen to 92% this morning. That may not please the President but with expectations for GDP growth in Q3 being marked higher after Q2's 4.1%, a very strong labour market and inflation just about at the 2% target, the Fed would argue that continued tightening is the only sensible option. About the only thing that the doves could take from the release is that with the Fed now embracing a "symmetrical" approach to the inflation target, they are likely to keep the pace of tightening "gradual" even if inflation overshoots the target.
The members of the FOMC seem bit by bit, to be overcoming their caution when it comes to faith in the strength of the economy. The WSJ's Daily Shot points out that the minutes included the word "strong" 32 times, a recent record and a stark contrast to last November's total of just 3. They also seem to be increasingly confident that inflation, so stubbornly low for so long, will stay around the 2% target.
That all sounds very satisfactory, so what does the Fed see as the risks to such a healthy scenario ? Top of the list, of course, is trade protectionism. As far as inflation goes, to some degree trade conflict is a two-edged sword in that while tariffs raise the price of imported industrial commodities, they also lower the cost of domestic agricultural products. On balance though, an escalation of the trade war would likely mean higher inflation, at least in the short-term. They also see protectionism as a threat to growth, especially if the trade dispute descends into all-out global warfare. That's presumably another view with which the President would not agree, not publicly anyway.
Other risks included the potential for a spike in oil prices and for vulnerable emerging markets descending into turmoil. This last point suggests that the Fed under Chairman Jay Powell WILL keep a watchful eye on global considerations just as his two predecessors (Yellen, Bernanke) did, even if historically the Fed has not always taken the broader view. We have to say that it would be pretty odd if the Fed didn't take the bigger picture into account, and it sounds strange to hear voices in the US (and there are still more than a few) suggesting that such considerations are beyond the Fed's remit and that they should concern themselves solely with domestic factors. Surely the point is that in this globalised modern era, what impacts the rest of the world also impacts directly upon the United States and its economy ?
In its way, though it may not sound it, perhaps the most interesting concern raised at the meeting revolved around fiscal matters. Much of the impetus behind the impressive growth numbers stems from the massive fiscal stimulus given to the economy by the administration's tax cuts. Such stimulus cannot last forever, and it's certainly possible that the fading of its effects comes faster, and bites deeper, than many are expecting. Moreover, such giveaways mean that government finances are headed into a dangerously deep hole. The WSJ amongst others refers to it as the "looming fiscal cliff", with matters due to come to a head in 2020.
It almost goes without saying that Mr Trump and his advisors would not agree with that prognosis either. They subscribe to the Laffer Curve theory, the most basic interpretation of which suggests that government income is actually increased by lowering taxes through revenue resulting from a larger economy. It's only fair to say that the Laffer Curve theory, or at least that simplified interpretation of it, has been pretty widely discredited .... but plainly not in the White House.
As we were saying, the market action suggests that the views held by members of the FOMC at the last meeting still apply. For a more up-to-date insight into Fed thinking, many will be looking to Chairman Powell's speech at Jackson Hole tomorrow. They might also be wondering if he will respond to the provocative comments President Trump has been throwing around. It's unlikely, central bankers avoid that kind of thing. But then again, even the most general reference to central bank independence would almost certainly be enough to light a fuse and provoke a presidential reaction ..... which is exactly why Mr Powell should probably avoid it.