Fed poised to keep raising rates to historically normal levels

New York

FEDERAL Reserve officials are poised to continue gradually raising interest rates, but are monitoring for signs of widespread economic fallout from President Donald Trump's trade policies, according to minutes from the most recent Fed meeting released on Wednesday.

The Fed minutes suggest that officials are concerned that Mr Trump's tariffs could hurt the current economic recovery but are waiting to see evidence of any damage in the data.

Fed officials are also increasingly worried that trouble is brewing in the residential construction market, based on a recent slowdown in home building.

But for now, the Fed shows no signs of deviating from its current path to return interest rates to more historically normal levels, despite Mr Trump's recent calls for the central bank to stop raising interest rates.

Several officials hinted in the minutes that they are preparing to remove a hallmark phrase of the last decade, one that has indicated the Fed intends to provide support for the economy. Future Fed statements may no longer carry language reading "the stance of monetary policy remains accommodative" as the Fed continues to wind down its post-crisis economic stimulus.

Federal Open Market Committee officials left rates unchanged after the meeting that ended Aug 1 and laid the groundwork in their post-meeting statement to raise rates in September, the third time this year. Since mid-July, Mr Trump has used interviews and Twitter to pressure the Fed and its chairman, Jerome Powell, to pause the pace of increases, which have left the Fed's target interest rate 1.75-2 per cent.

Minutes from the meeting revealed no willingness among Fed officials to grant Mr Trump's request.

Officials "indicated that information gathered since the Committee met in June had not significantly altered their outlook for the US economy", the minutes reported.

"Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation." That is Fed-speak for "raise interest rates again" - and the minutes note that investors are overwhelmingly convinced another rate increase is coming next month.

While the economic recovery is strong, the Fed minutes show that officials are cognisant of the disparity between slow growth in nominal wages and the strength of the labour market, but they are convinced those gains are about to accelerate.

Officials were united in their concerns over the potential of Mr Trump's trade policies to crimp economic growth. Mr Trump has imposed tariffs levied on steel and aluminium from countries including Japan, Mexico and Canada, and additional tariffs on other imported goods from China.

"All participants pointed to ongoing trade disagreements and proposed trade measures as an important source of uncertainty and risk," the minutes reported.

A prolonged trade dispute, officials said, would likely bring "adverse effects on business sentiment, investment spending and employment. Moreover, wide-ranging tariff increases would also reduce the purchasing power of US households" while disrupting supply chains and reducing productivity.

Other than trade, officials' largest worry about the economy was not inflation but residential construction. Several officials noted that new home building has slowed, possibly reflecting "declining home affordability, higher mortgage rates, scarcity of available lots in certain cities and delays in building approvals".

Officials also noted that mortgage purchases and home refinancing had slowed. Some expressed worry over "the possibility of a significant weakening in the housing sector" - an apparent reference to the effects of higher rates on borrowing and construction. There was no sign in the minutes that Fed officials were worried home values were in a "bubble".

In other areas, Fed officials expressed more division.

Some officials theorised that the slow pace of wage growth reflected slow productivity growth or lags in companies' responses to a tight labour market, which typically pushes employers to raise salaries when competing for workers. Others said the pace of increases suggests there is still more room for unemployment to fall before it begins to push up wages more significantly.

There are also continuing differences over the banking system and whether to push for even larger capital cushions given the robust economy. The minutes report officials argued for and against strengthening capital requirements for banks now, "while their profits are strong and the economic outlook is favourable", in order to better stabilise the financial system against an economic shock. NYTIMES