Rates have been raised seven times since late 2015 to make sure the historically low unemployment rate does not trigger unwanted inflation
Fed minutes signal rate rise likely at September meeting
Federal Reserve officials earlier this month said that a strengthening economy meant that it would “likely soon be appropriate” to increase their benchmark interest rate, a strong signal that rates will be going up in September.
But minutes of their discussions released on Wednesday also revealed increasing concerns that escalating trade wars could hurt the economy.
The CME Group’s tracking of investor expectations put the likelihood of a September rate rise at 96 per cent. Many economists believe another increase will follow in December.
“Another interest rate hike from the Fed is coming next month,” Paul Ashworth, chief US economist at Capital Economics, said in reaction to the minutes.
The Fed has raised rates seven times since late 2015 to make sure the lowest unemployment in nearly 50 years does not trigger unwanted inflation.
The Fed raised rates in March and June, pushing the federal funds rate to a level of 1.75 per cent to 2 per cent. The rate remained at a record low near zero for seven years from late 2008 to late 2015 as the central bank tried to combat the worst recession since the 1930s to encourage more borrowing by consumers and businesses.
The minutes, released after the customary three-week delay, covered the July 31-August 1 meeting. At that session, Fed officials left rates unchanged while releasing a policy statement that focused on a “strong” economy with solid growth and low unemployment.
The minutes, however, showed growing worries about the impact of President Donald Trump’s get-tough trade policies, which have imposed tariffs on billions of dollars in imports, triggering China and other trading partners to retaliate with tariffs on US goods.
“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,” Fed officials said.
The minutes listed a number of potential threats from disruptions in business supply chains to potentially triggering “a severe slowdown” in emerging-market countries.
Federal Reserve chairman Jerome Powell will deliver a policy address on Friday at the Fed’s annual gathering in Jackson Hole, Wyoming. Investors are watching to see if he signals any possible change in the expected course of interest rates because of the threats posed by a widening trade war.
The minutes said that if the economy remains strong as Fed officials are forecasting then “it would likely soon be appropriate to take another step” to raise rates with “further gradual increases” following.