uploads/2018/08/laptop-3196481_1280.jpg

A September Rate Hike Is Almost Certain—Beyond That, It’s Murky

By

Updated

Fed minutes

On August 22, the Federal Reserve released the minutes from the meeting it held from July 31 to August 1. The minutes signaled that it’s almost ready for another rate hike in its September policy meeting.

According to the Fed, if the incoming data continue to support their outlook, “it would likely soon be appropriate to take another step in removing policy accommodation.” This statement is a strong signal that the rate is going up again in September.

Article continues below advertisement

Fed’s policy path

The Fed started quantitative easing and the near-zero interest rate policy after the Great Recession to encourage more borrowing to boost the economy. It then started slowly tightening its policy, with the first rate hike seen in December 2015. It has hiked rates (TLT) a total of seven times since, with two rate hikes in 2018 thus far, pushing the federal funds rate to 1.75%–2.00%. The markets are expecting two more hikes this year.

The odds of a September rate hike increased from 90% to 96% after the release of the minutes. There is also a 60% chance of a hike in December, according to the CME FedWatch Tool.

The Fed also indicated that it may remove the language that signals its remaining “accommodative” in the monetary policy, as the economy is now strong.

Markets’ reaction

As we’ll discuss in the next article, while the Fed is cautious about trade war concerns, it remains on its gradual rate hike path. Moreover, policymakers remain upbeat about the US economy and expect that it will expand at an above-trend pace.

The reaction of stock markets to the minutes was mixed. The Dow Jones Industrial Average Index (DIA) and the S&P 500 Index (SPY) fell 0.3% and 0.04%, respectively, while the NASDAQ Composite Index (QQQ) edged up by 0.4%.

The US dollar (UUP), on the other hand, fell slightly after the release of the minutes as the Fed showed increased concern about trade tensions affecting economic growth. The dollar has been a major beneficiary of the trade war dispute as a safe-haven currency as the currencies of China and other emerging markets (EEM) have taken hits.

Advertisement

More From Market Realist