Fed funds futures rise after FOMC minutes
Rate-setters in the US continue to see a need for a "gradual" pace of monetary policy tightening, but are also in agreement that the behaviour of prices and of the shape of the government bond yield curve need monitoring, the minutes of the Federal Reserve's last policy meeting revealed.
So while "a few" participants indicated they were not comfortable with the three interest rate hikes projected for 2018, "a few other" participants believed more than three tightening moves would likely be appropriate.
Judging by the market reaction, investors may have been expecting a somewhat less hawkish set of minutes, with the market price implied odds of a 25 basis point rate hike in the Fed funds rate at the 20-21 Federal Open Market Committee meeting jumping by 12 basis points on Wednesday evening to 81%, according to Bloomberg data.
According to the minutes, policy-makers saw a possibility of an undue buildup in price pressures should economic output surpass its maximum sustainable level, either due to expansive fiscal conditions or accomodative financial ones.
Yet while "many" rate-setters on the FOMC expected inflation would move back to target, "some" thought that it might remain below it for longer than expected while yet others had concerns about inflation expectations.
Hence, inflation developments needed careful monitoring, they said.
"While participants generally saw the risks to the economic outlook as roughly balanced, they agreed that inflation developments should be monitored closely," the minutes read.
Regarding the recent flattening in the government bond yield curve, which past a certain point might be a signal of an impending recession, officials at the central bank said: "However, several participants thought that it would be important to continue to monitor the slope of the yield curve."
As for the Trump administration's recently enacted tax cuts, many policymakers thought they would lift consumer spending and deliver a "modest boost" to capital outlays.
As an aside, analysts at Danske Bank pointed out the second consecutive reference in the minutes to the possible adoption of a price level target, in response to the persistent undershoot by the Fed of its inflation target.
Nevertheless, Danske Bank assigned just a 15% probability to the possibility of the fed adopting such a target - which they believed would be a negative for the US dollar - in coming years and in 2019 at the earliest.