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Fed changes tune on raising interest rates this year

Minutes reveal more dovish approach

The Federal Reserve has been forecasting an average two to four rate hikes in 2018, however the minutes from its latest meeting reveal a more dovish approach.

(Video credit: Alcynna Lloyd)

Many experts have been more bullish in their approach to increases to the federal funds rate in 2018, forecasting a total of four rate hikes for the year. Last year, experts even predicted the President Donald Trump’s selection for Federal Reserve Chair wouldn’t matter – the market would still see four rate hikes.

And after the administration passed tax reform at the end of last year, experts again forecasted an increase in the federal funds rate, saying it could cause the Fed to speed up rate hikes.

Now, Fed funds futures are forecasting the chances of four rate hikes in 2018 at 37%, down from the previous 40%.

This decrease in confidence for four rate hikes is due to minutes from the Federal Open Markets Committee’s May meeting, which revealed a more dovish approach to raising rates. The minutes showed that while the Fed still holds that the economy warrants gradual increases to the federal funds rate, in several Districts, contacts expressed concern about the possible adverse effects of tariffs and trade restrictions, including the potential for postponing or pulling back on capital spending.

“It was noted that the potential for higher Chinese tariffs on key agricultural products could, in the longer run, hurt U.S. competitiveness,” the minutes stated.

The Federal Reserve voted against raising the federal funds rate in May, but this was expected. The market had predicted just a 6% chance of a rate hike at the May meeting, but a 94% chance of a 25 basis-point hike in June.

Now, that number remains relatively unchanged as most still expect to see a rate hike next month. Traders in the federal funds futures market currently see more than a 90% chance of a June rate hike.

And May’s minutes seemed to confirm this outlook.

“Most participants judged that if incoming information broadly confirmed their economic outlook, it would likely soon be appropriate for the FOMC to take another step in removing policy accommodation,” the minutes stated.

And while many expected about three to four rate hikes in 2018 followed by about three more in 2019, Dallas Fed President Robert Kaplan said the central bank may only have four more total rate hikes before it reaches the desired neutral level.

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