MNI ANALYSIS:US FOMC Minutes, Data Keep Gradual Rate Hike Path

By Sara Haire

     WASHINGTON (MNI) - Data released since the Federal Open Market Committee's

June meeting is likely to do little to dissuade the Fed from the rosy outlook on

the economy and gradual rate hike path suggested in the FOMC Minutes released

Thursday, despite growing uncertainty over trade and fiscal policy.

     The minutes ticked all the Fed's boxes in terms of gauging whether the

economy is doing well. The FOMC reiterated that the economy is growing at a

"solid" rate and the labor market has strengthened and is expected to continue

to do so, while inflation is expected to be sustained at their 2% objective.

     However, some participants have voiced concern over growth. They said a

prolonged period of above trend growth could end up leading to "a significant

economic downturn."

     This sentiment is not far-fetched, as US growth is expected to be partially

fueled over the next couple of years by the recent fiscal stimulus. Though a few

FOMC participants said the stimulus could be an upside risk, others voiced

concerns that fiscal policy is "not currently on a sustainable path."

--EMPLOYMENT REAFFIRMED MINUTES

     Friday's June employment report showed a stronger-than-expected 213,000

gain for payrolls, but a rise in the unemployment rate to 4.0%. The uptick in

unemployment was largely due to a 601,000 jump in the labor force.

     The data suggest new entrants did not find jobs immediately, but could add

to July's employment total. This slack adds upside risk that the FOMC may take

note of at their July meeting, or earlier in Chairman Powell's semi-annual

testimony on July 17.

     The only real weakness in Friday's report stemmed from average hourly

earnings being up only 0.2%, keeping the year/year at 2.7%. The year/year rate

has picked up in recent months especially compared with rates a year earlier,

but is still below expectations considering payrolls growth and low

unemployment.

     The minutes noted that "a number of participants" expected that while the

unemployment rate remains below the Fed's longer-run projection, this should

push "wage inflation to pick up further."

     This stagnant wage growth in the face of a growing labor force and

employment may discourage a slightly faster or steeper pace of rate hikes.

--INFLATION GOALS

     At the time of the June FOMC meeting, inflation hadn't been sustained at

the Fed's 2% objective, however participants agreed that inflation was on a

trajectory to hit their target. The core PCE price index in May finally achieved

that rate.

     However, a number of participants explained "that it was premature to

conclude that the Committee had achieved that objective." In fact, one

participant wanted to postpone a rate increase to facilitate a rise in inflation

expectations. The June consumer price index report, expected to be released on

Thursday should be a preliminary look at inflationary pressures stemming from

potential tariff threats.

--SENTIMENT REGARDING TRADE

     Though the FOMC meeting occurred prior to the Trump administration's

announcement of most of its planned tariff actions, participants still noted

concern, saying the risks associated "could have negative effects on business

sentiment and investment spending."

     Additionally, inflationary pressures have been rising and regional business

contacts indicated rising input costs that firms are pushing onto the consumer.

This could become pronounced in coming months unless trade negotiations occur.

     The U.S. officially took the first step toward a trade war Friday, placing

tariffs on $34 billion of Chinese imports. China immediately announced duties on

U.S. shipments including soybeans and automobiles.

     The minutes said conditions in the agricultural sector "reportedly improved

somewhat" recently, but were concerned about effects from higher tariffs,

something that has likely been reevaluated since.

     While trade tensions have escalated, Federal Reserve Chair Jay Powell and

Fed Governor Randal Quarles have been cryptic regarding trade policy. Both have

stated that tariffs are not in their policy area and their outlook remains

unchanged, but could be adjusted if necessary.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com

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