The Daily Update - The Federal Open Market Committee

The FOMC minutes of their August meeting were released last night which caused a limited reaction in asset markets. The Treasury market rallied modestly and the USD weakened as the minutes were initially released, with headlines suggesting that the Fed saw trade and slowdowns in emerging markets economies as downside risks to the outlook.

Many participants said it would likely be appropriate to “soon” raise rates and noted considerable momentum in household and business spending. They generally expect US GDP growth to slow in H2 2018 but to remain above potential. Some members noted it would likely be appropriate in the “not-too-distant future” to no longer refer to “accommodative” language. Officials noted the still strong labour market and predicted inflation will stay stable around the 2% target in the medium term.

Broadly, the minutes continue to point toward a continuation of the gradual pace of rate hikes, including a hike in September, with many participants thinking another step to remove accommodation would “soon be appropriate.” Participants’ reference to the downside risk from a slowdown in emerging market economies was mentioned just once in a list of potential downside risks which had trade frictions at the top.

They did not discuss the future state of the balance sheet in detail at the meeting, but they made it very clear that a full discussion of this will pick up steam in the autumn. At that time the market would be looking for guidance on the desired level of reserves, which in turn would determine when the balance sheet would hit "normal". Of particular interest would be when the Fed would have to start buying securities again and the composition of the purchases, would they concentrate on the Bill market or spread purchases across the curve.

As we have a long weekend here in the UK, the last Bank Holiday before Christmas, we shall have a short break on the daily, reporting back Tuesday next week.

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