The Fed Sticks to Its Plan, the Market Moves

Theminutes of the Federal Reserve ’s June FOMC meeting were released yesterday and there were few, if any, surprises. The minutes show a policy discussion hewing close to the Fed’s normalization plan. Members view the current economic expansion as “progressing roughly as anticipated” and see the risks to the economic outlook “as roughly balanced.” Though the Fed continues to undershoot its preferred measure of inflation, the Committee continues to expect 2% inflation “on a sustained basis over the medium term.” Two rather new developments received attention at the meeting. The first relates to increasing tensions over trade and tariffs. FOMC members are concerned that global disruptions and trade policies will exert downward pressure on financial markets. Furthermore, several regional Federal Reserve districts report that proposed plans for capital spending across the country have already been reduced, with several contacts within districts expressing concerns over tariff policies.The second issue is the flattening yield curve that has the potential to invert. Recently the spread between short-term and long-term Treasuries has narrowed. In the past, this compression haspresaged a recession. However, the FOMC is currently split as to whether or not the current flattening is similarly a cause for concern; namely, that increasing yields on the front end of the curve are indicative of investor concern about the short-term economic outlook. Due to this split, the ...

Source: Cato-at-liberty - July 6, 2018 Category: American Health Authors: Tate Lacey Source Type: blogs