Fed Minutes: Concerns of "Consequential Downside Risk" of Tariffs, Asset Values
Mike Mish Shedlock
Inquiring minds are slogging through Minutes of the Federal Open Market Committee July 31–August 1, 2018, released today.
The report is mostly a rah-rah about jobs, GDP and inflation with some downside and upside risks noted. Emphasis is mine.
The feature image is from the WSJ article Fed Signals Rate Increase at Next Month’s Meeting
The snips are from the FOMC Minutes.
Above Trend Growth
> In the U.S. economic forecast prepared for this FOMC meeting, the staff continued to project that the economy would expand at an above-trend pace. Real GDP was forecast to increase in the second half of this year at a pace that was just a little slower than in the first half of the year.
> On the upside, household spending and business investment could expand faster over the next few years than the staff projected, supported in part by the tax cuts enacted last year.
> On the downside, trade policies could move in a direction that would have significant negative effects on economic growth.
> The upside risk that inflation could increase more than expected in an economy that was projected to move further above its potential was counterbalanced by the downside risk that longer-term inflation expectations may be lower than was assumed in the staff forecast.
> [Participants] generally continued to see fiscal policy and the strengthening of the labor market as supportive of economic growth in the near term. Some noted larger or more persistent positive effects of these factors as an upside risk to the outlook.
> A few participants indicated, however, that a faster-than-expected fading of the fiscal impetus or a greater-than-anticipated subsequent fiscal tightening constituted a downside risk.
> Most expressed the view that an escalation in international trade disputes was a potentially consequential downside risk for real activity.
> All 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.
> Other downside risks cited included the possibility of a significant weakening in the housing sector, a sharp increase in oil prices, or a severe slowdown in EMEs.
> Participants who commented on financial stability noted that asset valuations remained elevated and corporate borrowing terms remained easy.
> In discussing the capital positions of large banks, a few participants emphasized that financial stability risks could be reduced if these institutions further boosted their capital cushions while their profits are strong and the economic outlook is favorable; arguments for and against the activation of the counter-cyclical capital buffer as a means of further strengthening the capital positions of large banks were discussed in this context.
Policy No Longer Accommodating
> 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 their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in June indicated that the labor market had continued to strengthen and that economic activity had been rising at a strong rate. Job gains had been strong, on average, in recent months, and the unemployment rate had stayed low. Household spending and business fixed investment had grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remained near 2 percent. Indicators of longer-term inflation expectations were little changed, on balance.
> Policymakers viewed the recent data as indicating that the outlook for the economy was evolving about as they had expected. Consequently, members expected that further gradual increases in the target range for the federal funds rate would be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Members continued to judge that the risks to the economic outlook appeared roughly balanced.
Word Counts: Upside, Downside, Trade, Tariffs
- Upside: 4
- Downside: 5
- Tariff: 5
- Trade: 22
- Trade Tension: 6
- Normalize: 0
Trade is clearly the top concern, yet risks are viewed as "balanced".
This is all meaningless, of course.
Mike "Mish" Shedlock