Fed: Appropriate to Continue Gradually Raising Target Zone for Fed Funds

The U.S. Federal Reserve released the minutes for its June meeting on Thursday at 1800 GMT. The highlights included some members expressing concerns over rising inflation and comments on the impact of trade restrictions.

According to the minutes, one key worry for Fed policymakers was letting the economy run too hot before major problems arise.

The meeting summary stated some members expressed “concern that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn.”

As a result of these fears, almost all FOMC policymakers believe they should continue to raise interest rates on a regular basis.

The minutes also stated economic growth is “progressing smoothly” with activity “expanding at a solid rate,” and “labor market conditions continuing to strengthen.” The minutes also showed the Fed’s measure of inflation is hovering around the central bank’s 2-percent target.

In mid-June, Fed policymakers approved another quarter-point hike to benchmark overnight borrowing rate. The Fed Funds moved to a range of 1.75 percent to 2 percent, the seventh such increase since December 2015. The minutes stated “almost all participants” thought the rate hike was appropriate.

Getting to Neutral

FOMC members approved removing a long-standing clause known as “forward guidance,” stating that the fund rate would remain “below levels that are expected to prevail in the longer run.”

Officials also said that if the current course continues, the rate actually could be above what they consider “neutral” by next year. Maintaining forward guidance “was no longer appropriate in light of the strong state of the economy and the current expected path for policy.”

How Low Can Unemployment Go?

If labor market trends since January continue, unemployment could reach 3.5% by December, significantly below Fed officials’ estimates of the level that is sustainable over the long run.

The FOMC addressed this matter according to the minutes. In the minutes, members expressed concerns over the difficulty employers are experiencing in finding qualified workers to fill job openings. Members noted that wage pressures remain “moderate” though they expect wage inflation to pick up soon.

How Worrisome Are Global Risks?

After the June meeting, Fed Chair Jerome Powell provided a bullish assessment of the U.S. economy’s performance. Since then, however, trade disputes and political turmoil in Europe have raised tensions, putting at risk Powell’s assessment of the economy.

The minutes showed Fed officials also expressed some worry about conditions overseas.

“Many participants saw potential downside risks to economic growth and inflation associated with political and economic developments in Europe and some emerging market economies.”