The Federal Reserve raised interest rates for the second time this year in its June meeting, amid concerns of a lurking international trade war, sparked by President Donald Trump’s relentless stance on tariffs.
According to the June 12–13 meeting minutes, made public on Thursday, central bankers intend to continue to hike the federal funds rate as unemployment plummets and inflation remains on target.
Despite these two positive economic indicators, however, Federal Reserve officials worried about a sudden downturn, sparked by retaliatory trade maneuvers. Canada and Mexico have already slapped new taxes on U.S. goods, while the U.S. and China are to levy duties on each other’s products worth some $34 billion.
“Most participants noted that uncertainty and risks associated with trade policy intensified and were concerned that such uncertainty and risks eventually could have a negative effect on business sentiment and investment spending,” according to the minutes, as cited by CNN Money.
The Federal Reserve’s business contacts echoed the unease and expressed plans to scale down their investments.
Federal Reserve policymakers also discussed disparate recession signs, such as the yield curve, which has charted a flattening trajectory, and the term spread, which has narrowed since last summer. They also looked at a new recession indicator – the spread between the current federal funds rate and its expected level several quarters ahead, derived from futures market prices.
Staffers who presented the new gauge, “noted that this measure may be less affected by many of the factors that have contributed to the flattening of the yield curve, such as depressed term premiums at longer horizons. Several participants cautioned that yield curve movements should be interpreted within the broader context of financial conditions and the outlook, and would be only one among many considerations in forming an assessment of appropriate policy.”
It seems unlikely that the Federal Reserve Open Market Committee considered the yield curve dynamics and the newly developed barometer as clear pointers to a recession in the making. Instead, policymakers agreed that the current state of the economy follows their expectations.
Signaling their conviction for smooth sailing, participants removed the “forward guidance” clause, which was first implemented in the early 2000s as a means for central bankers to communicate to the public their monetary policy expectations.
Maintaining forward guidance, the minutes state, “was no longer appropriate in light of the strong state of the economy and the current expected path for policy.”
Nonetheless, some committee members were wary of the economic outlook in Europe and several emerging markets, which could affect the U.S.