FOMC Minutes Show Members Bullish On Trump Tax Plan, Worried On Trade War

Gold has gained notably since The Fed hiked rates in March (as stocks have suffered) and the yield curve has collapsed, hardly signaling market confidence in the Jerome Powell's first rate-hike. But it appears the critical highlights from the meeting are a positive outlook on Trump's growth agenda...


The details:

The staff saw the risks to the forecasts for real GDP growth and the unemployment rate as balanced. On the upside, recent fiscal policy changes could lead to a greater expansion in economic activity over the next few years than the staff projected. On the downside, those fiscal policy changes could yield less impetus to the economy than the staff expected if the economy was already operating above its potential level and resource utilization continued to tighten, as the staff projected. Risks to the inflation projection also were seen as balanced. An upside risk was that inflation could increase more than expected in an economy that was projected to move further above its potential. Downside risks included the possibilities that longer-term inflation expectations may have edged lower or that the run of low core inflation readings last year could prove to be more persistent than the staff expected.

Meanwhile, anxiety is growing over Trump's Trade wars...


Some more details on how the FOMC sees trade war:

A number of participants reported concern among their business contacts about the possible ramifications of the recent imposition of tariffs on imported steel and aluminum. Participants did not see the steel and aluminum tariffs, by themselves, as likely to have a significant effect on the national economic outlook, but a strong majority of participants viewed the prospect of retaliatory trade actions by other countries, as well as other issues and uncertainties associated with trade policies, as downside risks for the U.S. economy. Contacts in the agricultural sector reported feeling particularly vulnerable to retaliation.

Notably, as the dots revealed, there are a few hawks and doves who established the endpoints around the more centrist views, but the minutes offered little additional clue as to who they were.

Stocks down, bonds & bullion up...


Yield curve down...

Bloomberg reports the following are selected excerpts from the FOMC meeting minutes that concluded on March 21:

"Participants did not see the steel and aluminum tariffs, by themselves, as likely to have a significant effect on the national economic outlook, but a strong majority of participants viewed the prospect of retaliatory trade actions by other countries, as well as other issues and uncertainties associated with trade policies, as downside risks for the U.S. economy."

"Tax changes enacted late last year and the recent federal budget agreement, taken together, were expected to provide a significant boost to output over the next few years."

"A few participants noted that the changes in tax policy could boost the level of potential output."

"Almost all participants agreed that it remained appropriate to follow a gradual approach to raising the target range for the federal funds rate."

"A number of participants indicated that the stronger outlook for economic activity, along with their increased confidence that inflation would return to 2 percent over the medium term, implied that the appropriate path for the federal funds rate over the next few years would likely be slightly steeper than they had previously expected."

"Some participants suggested that, at some point, it might become necessary to revise statement language to acknowledge that, in pursuit of the Committee’s statutory mandate and consistent with the median of participants’ policy rate projections in the SEP, monetary policy eventually would likely gradually move from an accommodative stance to being a neutral or restraining factor for economic activity."

"A couple of participants pointed to possible benefits of postponing an increase in the target range for the federal funds rate until a subsequent meeting; these participants suggested that waiting for additional data to provide more evidence of a sustained return of the 12-month inflation rate to 2 percent might more clearly demonstrate the data dependence of the Committee’s decisions and its resolve to achieve the price-stability component of its dual mandate."

"Participants expressed a range of views on the amount of policy tightening that would likely be required over the medium term to achieve the Committee’s goals."

"Many participants stated that recent readings from indicators on inflation and inflation expectations increased their confidence that inflation would rise to the Committee’s 2 percent objective in coming months and then stabilize around that level; others suggested that downside risks to inflation were subsiding."

"All participants agreed that the outlook for the economy beyond the current quarter had strengthened in recent months. In addition, all participants expected inflation on a 12-month basis to move up in coming months."

"Regarding wage growth at the national level, several participants noted a modest increase, but most still described the pace of wage gains as moderate; a few participants cited this fact as suggesting that there was room for the labor market to strengthen somewhat further."

"Participants noted incoming data suggesting some slowing in the rate of growth of household spending and business fixed investment after strong fourth-quarter readings. However, they expected that the first-quarter softness would be transitory, pointing to a variety of factors, including delayed payment of some personal tax refunds, residual seasonality in the data, and more generally to strong economic fundamentals."

Also of note: the Fed's discussion on the blow out in Libor-OIS which, as one would expect, was blamed on the wrong thing, the net surge in T-Bill issuance, which however we now know is no longer a factor and yet both Libor and L-OIS remain at post-crisis wides:

In short-term funding markets, increased issuance of Treasury bills lifted Treasury bill yields above comparable-maturity OIS rates for the first time in almost a decade. The rise in bill yields was a factor that pushed up money market rates and widened the spreads of certificates of deposit and term London interbank offered rates relative to OIS rates. The upward pressure on money market rates also showed up in slight increases in the effective federal funds rate and the overnight bank funding rate relative to the interest rate on excess reserves. The rise in market rates on overnight repurchase agreements relative to the offering rate on the Federal Reserve’s ON RRP facility resulted in low levels of takeup at the facility.

And the now standard timestamp:

Reductions in the size of the Federal Reserve’s balance sheet continued as scheduled without a notable effect on markets.

We'll check back on this very soon...

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