Fed Minutes: Trade War is a Downside Risk

By Heisenberg

As I mentioned over the weekend, these will be parsed pretty closely for any mention of trade concerns, especially in light of what Jerome Powell didn’t say on Friday at his speech in Chicago. Additionally, traders will be looking closely for any further color in the Minutes about the upward revision to the near- and medium-term growth path in the SEP versus the unchanged longer-term outlook. Also, folks will probably be looking for some further color on the projected moderate inflation overshoot tipped in the March SEP.

Here’s a bit of color from BofAML on what to look for in what you’ll (maybe) read below:

The minutes of the March 21st FOMC meeting should have an optimistic undertone but highlight the debate over the outlook for growth and inflation with some concern over tighter financial conditions and trade tensions. On growth, we think there will likely be discussion about whether the recent improvement – upward revisions in growth this year and next – would be able to generate healthier longer term growth. Note that the median for long-run growth is stuck at 1.8% so the consensus is still in the camp that the economy is on a structurally lower trajectory. That said, we could see a number of arguments made for higher productivity growth. We also think the debate over inflation continues with the majority arguing that the Phillips Curve is relevant but noting the challenges that have left it quite flat. The discussion around financial conditions should be of interest given that there has been recent tightening and measures such as the Libor-OIS spread have widened, suggesting funding pressures. It will be interesting to see if Fed officials shrug this off or show some concern. We will also look for discussion around the risks from growing trade tensions given the move to implement tariffs – will Fed officials discuss how that might filter back into the economy? How are they handicapping the risk?

Without further ado…

Bullet points:

  • “Participants did not see the steel and aluminum tariffs, by themselves, as likely to have a significant effect on the national economic outlook, but a strong majority of participants viewed the prospect of retaliatory trade actions by other countries, as well as other issues and uncertainties associated with trade policies, as downside risks for the U.S. economy.”
  • “Tax changes enacted late last year and the recent federal budget agreement, taken together, were expected to provide a significant boost to output over the next few years.”
    • “A few participants noted that the changes in tax policy could boost the level of potential output.”
  • “Almost all participants agreed that it remained appropriate to follow a gradual approach to raising the target range for the federal funds rate.”
    • “A number of participants indicated that the stronger outlook for economic activity, along with their increased confidence that inflation would return to 2 percent over the medium term, implied that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected.”
    • “Some participants suggested that, at some point, it might become necessary to revise statement language to acknowledge that, in pursuit of the Committee’s statutory mandate and consistent with the median of participants’ policy rate projections in the SEP, monetary policy eventually would likely gradually move from an accommodative stance to being a neutral or restraining factor for economic activity.”
    • “A couple of participants pointed to possible benefits of postponing an increase in the target range for the federal funds rate until a subsequent meeting; these participants suggested that waiting for additional data to provide more evidence of a sustained return of the 12-month inflation rate to 2 percent might more clearly demonstrate the data dependence of the Committee’s decisions and its resolve to achieve the price-stability component of its dual mandate.”
    • “Participants expressed a range of views on the amount of policy tightening that would likely be required over the medium term to achieve the Committee’s goals.”
  • “Many participants stated that recent readings from indicators on inflation and inflation expectations increased their confidence that inflation would rise to the Committee’s 2 percent objective in coming months and then stabilize around that level; others suggested that downside risks to inflation were subsiding.”
    • “All participants agreed that the outlook for the economy beyond the current quarter had strengthened in recent months. In addition, all participants expected inflation on a 12-month basis to move up in coming months.”
  • “Regarding wage growth at the national level, several participants noted a modest increase, but most still described the pace of wage gains as moderate; a few participants cited this fact as suggesting that there was room for the labor market to strengthen somewhat further.”
    • “Participants noted incoming data suggesting some slowing in the rate of growth of household spending and business fixed investment after strong fourth-quarter readings. However, they expected that the first-quarter softness would be transitory, pointing to a variety of factors, including delayed payment of some personal tax refunds, residual seasonality in the data, and more generally to strong economic fundamentals.”

Full .pdf:

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