Muted inflation still concerns Fed with regard to future tightening moves

Inflation concerns US FedUS Federal Reserve

The minutes of the Fed’s late July meeting released yesterday reflect ongoing concern about muted inflation data, as well as the fact there seems to be some discrepancy amongst FOMC members over when would be the right time to begin the normalisation of the central bank’s balance sheet.

Julius Baer economist, Stephanie Lindeck, says the minutes “cast some doubts on the coming tightening path of the Fed” due to many members of the FOMC being worred about weak inflation figures.

“Thus the debate on the timing of future rate hikes, as the beginning of the Fed’s balance sheet reduction has been revived.”

“The probability of a rate hike in December as implied by the Fed funds futures fell by a few percentage points and currently stands at 40%, while the USD depreciated marginally against the EUR,” Lindeck notes.

But she also flags that this week’s retail sales figures showed US consumer spending should back “the more than benign growth in the second half of 2017.”

 “More importantly, taking into account the continued tightening of the labour market, inflation should pick up soon enough to support the Fed in its decision to tighten monetary policy by the end of this year,” she adds.

Julius Baer is maintaining its forecast for another rate hike in December and a strengthening US dollar in the coming months.

Intermoney says that according to the minutes of last month’s meeting, various FOMC members had expressed their intention of revealing a date for the start of the balance sheet reduction in that July meeting.

“At the same time, concern was shown by some members about increasingly weaker inflation data, which goes against further monetary tightening. Some members were also predisposed to holding back on more rate hikes until it was clear that the current trend was transitory,” Intermoney adds.

Intermoney also highlights that some members held the view that the downside risks with regard to the outlook for inflation “could be more real in the future.”

“But other members warned that the CPI’s lack of haste could spark an eventual recovery which would be costly to reverse,” the experts noted.