20180706-大华银行-Macro_Note_US_June_FOMC_Minutes__Sticking_To_Gradual_Rate_Hike_Trajectory_3页_269kb

US June FOMC Minutes Summary

Core Content

The Federal Open Market Committee (FOMC) meeting on 13 June 2018 resulted in a unanimous decision to raise the Federal Funds Target Rate (FFTR) by 25 basis points (bps), bringing it to the $1.75 - 2.00%$ range. Additionally, the balance sheet reduction (BSR) program was increased to $40bn in July 2018, as previously scheduled. The minutes from the meeting provide insight into the committee's outlook and decision-making process for the remainder of 2018 and into 2019.

Key Takeaways from the Minutes

• Gradual Rate Hike Trajectory:
  The FOMC participants are inclined to maintain a gradual approach to rate hikes in the medium term. They believe the economy is already very strong and inflation is expected to remain at 2% over the medium term.

  • The committee sees it appropriate to continue gradually raising the FFTR to a level at or above the longer-run estimate by 2019 or 2020.

• Concerns Over Economic Overheating:
  Some members expressed concerns that prolonged economic activity above potential could lead to heightened inflationary pressures or financial imbalances.

• Trade Risk as a Downside Risk:

  • Trade policy uncertainty, particularly related to tariffs and trade restrictions, is a significant risk.
  • Many District contacts are worried about the adverse effects of these policies on future investment and capital spending.
  • Participants noted that uncertainty and risks related to trade policy have intensified, potentially affecting business sentiment and investment.

• Yield Curve Flattening:

  • There was a lengthy discussion on the flattening of the US yield curve.
  • The staff presentation indicated that multiple factors could contribute to the narrowing of the spread between long-term and short-term Treasury yields.
  • These factors may reduce the reliability of the yield curve as an indicator of future economic activity.
  • The Fed will continue to monitor yield curve developments.

• Forward Guidance Removal:

  • The FOMC decided to remove forward guidance from its statements, which previously indicated that rates would remain below the longer-run level.
  • This change does not signal a shift in the Fed's policy approach but reflects a more data-dependent strategy.

FOMC Outlook for 2018

• Rate Hike Expectations:

  • The market currently expects two more rate hikes in the second half of 2018, following the June increase.
  • The FFTR range is projected to reach $2.25 - 2.50%$ by the end of 2018.
  • Even if the Fed hikes four times in 2018, it is not seen as excessive tightening.
  • The outlook for 2019 remains unchanged, with three 25bps hikes expected, which would push the FFTR above the long-run estimate of $3.0%$ by mid-2019.

• Market Risks:

  • Stronger wage and inflation expectations could lead to a more aggressive Fed.
  • However, the intensified trade policy uncertainty could result in a more cautious approach.

Market Events to Watch

• Tariffs on Chinese Goods:

  • The first wave of 25% US tariffs on $34 billion of Chinese goods is scheduled to be imposed on 6 July 2018 at 12:01 am (US time) or 12:01 pm (SGT).
  • President Trump indicated that another $16 billion of goods could be subject to tariffs in two weeks.

• Fed Reports and Testimonies:

  • The Fed will release its semi-annual report to Congress on 13 July 2018 (11pm SGT).
  • FOMC Chair Jerome Powell will testify before the Senate Banking Committee on 17 July 2018 (10pm SGT).

Recent Publications

• Malaysia: May exports showed a slowdown, indicating reduced momentum in export growth.
• Indonesia: Bank Indonesia's next move will depend on incoming data.
• RBA: The Reserve Bank of Australia held its interest rate at the current level.
• US Dollar: The US Dollar is expected to continue its strong performance in the second half of 2018.
• Vietnam: Economic growth slowed to 6.8% in the second quarter of 2018.
• RBNZ: The Reserve Bank of New Zealand adopted a slightly more dovish tone.
• SGS: The 20-year auction saw strong demand and remains attractive on relative value.
• USD/CNY: The recent rally in the USD/CNY exchange rate is viewed as too rapid and excessive.

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Disclaimer

This document is for informational purposes only and does not constitute investment advice. It is not intended for distribution in any jurisdiction where it would be unlawful. The views expressed are those of the author and not necessarily those of UOB Group. UOB Group may have positions in the securities mentioned and does not guarantee the accuracy or completeness of the information provided.