MNI POLICY: Fed Minutes To Reaffirm Positive Outlook

By Sara Haire

     WASHINGTON (MNI) - The Minutes from the July 31-August 1 Federal Open

Market Committee meeting are set to be released later this Wednesday and will

likely give a better understanding of how Fed officials view trade policy, the

yield curve, and the economy and how that may affect future monetary policy

decisions.

     Prior to the FOMC meeting, the Beige Book detailed heightened concern over

U.S. trade policy. Manufacturers in all the districts voiced their concern over

tariffs and in many of the districts, there were higher prices and supply

disruptions which were traced to the recent trade policies.

     Federal Reserve officials had been quiet in the weeks leading up to the

meeting and even after the meeting, with very few scheduled speeches from

policymakers. However, Dallas Fed Bank President Rob Kaplan did not hesitate to

say on Tuesday that "...U.S. trade policy, particularly regarding NAFTA, are

issues that could negatively impact the outlook."

     The Minutes will likely hold more details on the Committee participants'

views on trade and what this could mean for the outlook. Seeing as the Minutes

are backward-looking and there have been further developments in trade policy

since the FOMC meeting, the Minutes should give a backboard for further

discussion when policymakers meet in Jackson Hole on Thursday.

--ELABORATING ON ECONOMY

     However, the economic outlook at the time of the meeting was very positive.

In fact, economic activity was described in the statement as "strong" for the

first time since May 2006.

     Within the August 1 statement, there was further indication of an upbeat

overview of economic conditions, describing the labor market as still

strengthening, while noting that "household spending and business fixed

investment have grown strongly."

     There may be some discussion, however, in reference to business fixed

investment. Atlanta Fed Bank President Raphael Bostic reiterated on Monday that

the uncertainty of trade policy may be causing investment to pause from

companies that are hesitant for fear of fluctuating prices and disrupted supply

chains.

     Despite the uncertainty over trade policy, the Fed has seemingly been

undeterred by the possibility of negative effects and instead has chosen to

focus on incoming data to inform policy decisions.

     The data so far has encouraged the Fed to continue gradually removing

accommodation and the Minutes will likely bolster the likelihood of a September

hike and may hint towards a December hike, but are more likely to leave any

clear indication off the table.

--SMALL IOER ADJUSTMENT AGAIN?

     At the FOMC meeting in May, the Minutes from the meeting revealed the

Committee discussed a small technical adjustment that would entail raising the

IOER rate by only 20 basis points when they increased the Fed funds rate by 25

basis points, which is what they did at the next meeting in June.

     This adjustment has proven to be effective and several Fed officials have

said that this tool may be used again in the future, so there is potential for

it to be discussed in these Minutes given an interest rate increase is all but

baked in for the upcoming September meeting. However, most officials have said

that the adjustment is working for now, and may not feel the need to make

another change that soon.

     There may also be mention of the yield curve following a brief mention of

it in the last minutes, but it is likely to echo the general sentiment of most

policymakers, that while it is necessary to watch the curve, it should not be

the only reason to deter them from continuing on their policy path.

     Kaplan also said on Tuesday that the shape of the yield curve is "worth

paying attention to" and later said it suggests we are "late in the economic

cycle."

     Further, Bostic made waves on Monday when he pledged to "not vote for

anything that will knowingly invert the curve." These views coincide with how

St. Louis Fed President Jim Bullard views the yield curve. Bostic is a voting

member of the FOMC while Kaplan and Bullard are not, however, Bullard will be a

voting member in 2019.

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

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