“Policy would need to become modestly restrictive for a time.” This is the key quote from the recent FOMC minutes. This is not a reason for gold’s joy.
Fed Is Becoming More Hawkish
Yesterday, the Fed released minutes from the recent FOMC meeting. As everyone knows, the Committee hiked interest rates by another 25 basis points in September. But what about the future stance? Well, the minutes signal that the FOMC is going to be more hawkish in the near future(as we have been warning for some time). The key paragraph is as follows:
Participants offered their views about how much additional policy firming would likely be required for the Committee to sustainably achieve its objectives of maximum employment and 2 percent inflation. A few participants expected that policy would need to become modestly restrictive for a time and a number judged that it would be necessary to temporarily raise the federal funds rate above their assessments of its longer-run level in order to reduce the risk of a sustained overshooting of the Committee’s 2 percent inflation objective or the risk posed by significant financial imbalances. A couple of participants indicated that they would not favor adopting a restrictive policy stance in the absence of clear signs of an overheating economy and rising inflation.
It means that only “a couple of participants” would not raise the federal funds rate above the neutral level without strong indicators of accelerating inflation which could risk over heating of the US economy. Meanwhile, the majority of them (this is our understanding of the sum of “a few” and “a number”) would not have any qualms to do that. The conclusion is clear: the restrictive policy is coming, brace yourselves!
Why Is Fed Tightening?
How the US central bank justified its hawkish stance? Well, the recent data is encouraging. Although inflation remains near 2 percent, it may modestly exceed the Fed’s target, as reports from business contacts indicate the rise in input prices due to the strong demand or import tariffs and the increased ability of domestic companies to raise the prices in an environment of trade wars.
