Greetings, forex friends! The minutes of the August FOMC meeting were released yesterday. And if you missed it and if you want a quick rundown of the key takeaways that you should know about, then today’s roundup is just what you need.
1. U.S. economy is evolving as expected
If y’all can still recall, the Fed changed its assessment of the U.S. economy during the FOMC statement.
To be more specific, the Fed had this to say about the economy during the June FOMC statement (emphasis mine).
“Information received since the Federal Open Market Committee met in May indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate.”
In contrast, this is what the Fed had to say during the August FOMC statement (emphasis mine).
“Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate.”
Well, the minutes of the August FOMC meeting shed more light on that positive assessment since the minutes noted that:
“Participants generally noted that economic growth in the second quarter had been strong; incoming data indicated considerable momentum in spending by households and businesses.”
However, the minutes also revealed that “several” Fed officials doubted the sustainability of stronger-than-expected growth:
“Several participants stressed the possibility that real GDP growth in the second quarter may have been boosted by transitory factors, including an outsized increase in U.S. exports.”
Moreover, “participants generally expected that GDP growth would likely slow from its second-quarter rate.”
Despite the weaker outlook, Fed officials forcast that GDP growth “would still exceed that of potential output.”
And they justified their forecast of above-trend GDP growth by citing a number of favorable economic factors, which include “a strong labor market, stimulative federal tax and spending policies, accommodative financial conditions, and continued high levels of household and business confidence.”
With regard to inflation, the minutes noted that “Many participants anticipated that, over the medium term, high levels of resource utilization and stable inflation expectations would keep inflation near 2 percent.”
Overall, the minutes showed that Fed had a generally positive assessment of and outlook for the U.S. economy.
The minutes even noted that:
“With regard to the medium term, various participants indicated that information gathered since the Committee met in June had not significantly altered their outlook for the U.S. economy.”
In other words, “various” Fed officials think that the U.S. economy is evolving within expectations.
2. Rate hike “would likely soon be appropriate”
Since the economy is evolving within expectations, “many” Fed officials think that a rate hike “would likely soon be appropriate.”
To quote the minutes directly:
“Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation.”
And that hawkish forward guidance opens the door for a likely September rate hike.
But as always, the Fed repeated its disclaimer that “the actual path for the federal funds rate would ultimately depend on the incoming data and on how those data affect the economic outlook.”
3. Fed may change its language
Another consequence of the U.S. economy evolving within expectations is that the Fed may change its characterization of its monetary policy.
“Many participants noted that it would likely be appropriate in the not-too-distant future to revise the Committee’s characterization of the stance of monetary policy in its postmeeting statement. They agreed that the statement’s language that ‘the stance of monetary policy remains accommodative’ would, at some point fairly soon, no longer be appropriate.”
In other words, the Fed is saying that it would soon be time to remove the phrase that “the stance of monetary policy remains accommodative” from its monetary policy statement.
And that implies that the Fed is planning to switch from a supportive role (for a weak/recovering economy) to a more restraining role (for a growing economy that may overheat). And that’s a positive message.
4. Trade is a major downside risk
The minutes weren’t all about happiness and sunshine, though, since the minutes also warned about several downside risks to the U.S. economy, which include “the possibility of a significant weakening in the housing sector, a sharp increase in oil prices, or a severe slowdown in EMEs (emerging market economies).”
However, the minutes showed that Fed officials paid extra attention to trade, noting that:
“[A]ll participants pointed to ongoing trade disagreements and proposed trade measures as an important source of uncertainty and risks.”
“Participants observed that if a large-scale and prolonged dispute over trade policies developed, there would likely be adverse effects on business sentiment, investment spending, and employment.”
“Moreover, wide-ranging tariff increases would also reduce the purchasing power of U.S. households. Further negative effects in such a scenario could include reductions in productivity and disruptions of supply chains.”
The release of the minutes caused the Greenback to tumble across the board as a knee-jerk reaction, probably because of the Fed’s worries about trade.
However, it’s also possible that U.S. political drama may have been weighing on the Greenback since the Greenback was already encountering some selling pressure before the minutes were released.
In any case, bulls quickly charged in and limited the Greenback’s losses. After all, the minutes presented a hawkish message overall.
And as a bonus, the Greenback also got a boost from cross currency flows as political troubles in Australia caused an Aussie selloff. Moreover, the Greenback also began to attract safe-haven demand as new tariffs took effect.