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REPEAT:MNI ANALYSIS: US FOMC Minutes, Data Keep Gradual Path

Repeats Story Initially Transmitted at 19:28 GMT Jul 6/15:28 EST Jul 6
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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