The Federal Open Market Committee released the minutes from its June meeting Thursday, where the committee elected to raise interest rates for the second time in 2018.
The minutes showed the Federal Reserve is not concerned about the rising threat of a trade war or other economic disruptions.
Many economists are predicting disruptions to not only the U.S. economy but also to the world, predicting gross domestic product could drop by 0.1 percentage points in the U.S. and 0.4 percentage points worldwide due to President Donald Trump’s trade war.
And while the Federal Reserve did mention some global economic challenges during its meeting, they were not the focus and did not seem to affect members’ predictions for the future of rate hikes.
“In Europe, concerns about the political situation in Italy and its potential economic implications prompted a significant widening in risk spreads on Italian sovereign securities,” the minutes said. “The share prices of Italian banks and other banks that could be exposed to Italy declined sharply.”
According to the minutes, Fed members said that while global financial markets were buffeted by increased concerns about growth and political developments in Italy, these concerns were subsequently eased.
“On net, Treasury yields were little changed despite significant intra-period moves, and the dollar appreciated notably as a range of AFE and EME currencies and sovereign bonds came under pressure,” the minutes explained.
The Fed members did touch on turbulence in Europe and mounting concerns about trade policy, but the majority of its focus was on the improvement of the U.S. economy.
“The information reviewed for the June 12–13 meeting indicated that labor market conditions continued to strengthen in recent months, and that real gross domestic product appeared to be rising at a solid rate in the first half of the year,” the minutes said.
And the housing market is looking up as well, the minutes revealed. The FOMC announced that borrowers with low credit scores still face tight lending conditions, but those conditions continue to ease. But members discussed that growth in the home-buying market slowed in recent months and refinance activity dropped, due in part to rising mortgage rates.
In the U.S. economic forecast prepared for the June FOMC meeting, members continued to project that the economy would expand at an above-trend pace. Members predicted they will continue to raise interest rates over the next couple years.
“With regard to the medium-term outlook for monetary policy, participants generally judged that, with the economy already very strong and inflation expected to run at 2% on a sustained basis over the medium term, it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer run level by 2019 or 2020,” the minutes stated.
What’s more, the Fed determined that it was time to remove the wording, “the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run” from its guidance language.
Members noted that, although this forward-guidance language had been useful for communicating the expected path of the federal funds rate during the early stages of policy normalization, it is no longer appropriate in light of the strong state of the economy and the current expected path for policy.
But some Fed members are still taking a more dovish approach. While many expected about three to four rate hikes in 2018 followed by about three more in 2019, Dallas Fed President Robert Kaplan recently said the central bank may only have four more total rate hikes before it reaches the desired neutral level.
And former Federal Reserve Chair Ben Bernanke confirmed what many experts are already predicting: The next recession is less than two years away.
