Fed June Meeting
The US Federal Open Market Committee 12-13 June meeting will be one to watch. Not only will there be a decision on policy strategy but also a Summary of Economic Projections and a press conference by Fed Chair Powell. It is universally expected that the Fed will hike rates by 25bp at this meeting, and then follow up with two additional hikes in September bring the total for 2018 to three.
Let the economy grow
In light of US economic outperformance, after a slow 1Q, there has been a growing expectation of tighter monetary policy. In response, US yields have rallied, with 10-year yields climbing above 3.0% and USD benefiting from the higher interest rate. Yet, in recent meeting minutes, the Fed gave no indication that they would increase the pace of tightening. Instead they indicate a willingness to allow inflation rate to rise above 2% for a “temporary period,” while the economy continues to grow.
No overheating after all ?
The policy decision and corresponding meeting minutes at the May meeting were widely viewed as a confirmation by Fed officials that they will not steepen the tightening cycle to reach historically normal levels quicker. Fed members continue to express confidence in the strong economy, seemingly dismissing their previous warning that low unemployment (3.9% unemployment rate) would trigger a rapid wage and price acceleration, causing “overheating”.
However, the Fed remains concerned over global trade tensions, specifically the strained relations between the US and China. Currently, the markets have embraced the Fed strategy but watch for their reaction, should the June meeting provide stronger assessment of the economic outlook and revise forward guidance, potentially hinting at additional rate hikes.