<p>The US Fed March meeting minutes unveiled a hawkish tone. It paves the way for a rate hike to occur in June. We discuss key thoughts on the Fed meeting minutes.</p><p><b><span style="text-decoration: underline;">Boost from fiscal policy</span></b></p><p>The Fed meeting minutes anticipates the US economy to expand more rapidly in the medium term. Real GDP growth could “increase at a faster pace” through 2020, despite softness in first quarter this year. Labour market is expected to tighten further with unemployment rate possibly declining to 3.6%. The drivers of robust economic outlook are expansionary fiscal policy measures such as spending increases and tax cuts. The committee expects fiscal policy to “provide a significant boost to output over the next couple of years.”</p><p>For inflation, the committee expects it to pick up and could reach the 2% inflation target soon. Post Fed meeting suggests that inflation remain strong with headline CPI and core CPI in March up 2.4% and 2.1% respectively on an annualized basis. Core PCE in February climbed 1.6% in February and could reach 2.0% in March.</p><p><b><span style="text-decoration: underline;">Keep calm and carry on</span></b></p><p>Despite recent market volatility, the minutes described financial conditions as supportive. The committee acknowledged that that equity prices have corrected in the light of “still-high valuations for equities”. As for the recent rise in LIBOR, they do not see its rise as a threat to economic growth. They believed that accommodative conditions will continue “to support further expansion of economic activity.”</p><p>On the other hand, there are concerns on the impact of a trade war to the US economy. Although the initial steel and aluminium tariffs are likely to be absorbed by the economy, further retaliatory trade actions from other countries could pose significant downside risks to the economy.</p><p><b><span style="text-decoration: underline;">Steeper rate path</span></b></p><p>The US Fed expects more policy tightening with the dot plot indicating a more aggressive pace of rate hikes in 2019 and 2020. A number of participants sees the need for a “steeper rate path” with the Fed funds rate likely to exceed its longer-run rate.</p><p>In addition, the committee is considering changing the language of the Fed statement to state that the Fed “would likely gradually move from an accommodative stance to being a neutral or restraining factor for economic growth.” This is a significant shift from a dovish stance to more hawkish one.</p><p>The Fed is ready for more interest rate increases, with the next hike likely to occur in June. The hawkish meeting minutes has paved the way for that to happen.</p><p><b>Edmund Chan, CFA</b></p>