What do the Fed's minutes show?

That wasn't the only thing. Stock indices lost hundreds of points per minute and long-term interest rates climbed to levels last seen in 2014. Here and there, investors even started to think that the Fed would raise official interest rates in the US 4 times this year, instead of the promised 3 times.

All these things took place the day after the Fed interest rate committee meeting (at the end of January). The minutes of that meeting were published this week. How did members see the US economy developing, and how does this reflect recent events in the markets and the economy?

Growth prospects
Central bankers remain optimistic about growth prospects. The main reasons for this are the tax cuts, the high growth of the world economy and the favorable state of affairs on the financial markets (low interest rates and the significant increase in share prices). 

A number of members of the interest rate committee even indicated that they would raise their own expectations about economic growth this year. One of those members recently said in an interview that the "US economy is doing very well and is in the best shape since it entered the crisis." According to him, the economy is even doing better than in the period before the crisis.

Further as in no further
After the publication of the minutes, long-term interest rates rose further and share prices came under downward pressure. The dollar gained ground. The reason for this was one word from the minutes: further. While the Fed spoke before January of the need for gradual interest rate increases in 1, it now called for further gradual interest rate increases. I don't think we should read that as more rate increases, but rather as 2018 rate increases (as planned) after the increase in December last year.

While the Fed is optimistic about American growth prospects, this does not apply to inflation developments. And that is what the US central bank is all about. However, it should be noted that some members do see the risks to the rosy growth prospects increasing.

What does inflation do?
A number of committee members are therefore of the opinion that growth can pick up further and that this can push up inflation, but on the other hand there is a group that fears that inflation will remain below the target rate of 2% to 2,5% for a long time. In short: the Fed is still uncertain about how to assess this new economic phase of continued growth and higher inflation (although still too low). Is it temporary, or do the developments show structural features?

Can the further rise in long-term interest rates be seen as an 'opinion' from the bond market stating that the Fed is moving 'behind the curve' (read: raising interest rates due to economic developments)? Time will have to tell. I would also like to note that it is very important who should fill those 4 vacant seats on the interest rate committee. Since it concerns 4 places, this could be decisive in obtaining a majority.

fragile
The common denominator for a large majority is that they see US inflation rising to the desired rate in the medium term. This is because economic growth will remain above trend and the labor market will remain strong. In my opinion that is very important. 

This indicates that a disappointing figure could result in a moderation of expectations about interest rate increases. This with all its consequences. Since the monthly inflation figures are volatile and the growth figures can be adjusted after the initial estimate, this can easily happen. 

However, the same applies the other way around. A more positive figure will ensure that the idea of ​​4 interest rate increases becomes stronger. That could cause a strong dollar, rising interest rates and falling stock prices.

Base expectations on Fed
However, I would not be surprised if the market places a large part of its expectations about Fed policy on the publication of an important macroeconomic figure. In the short term, this includes the figures on inflation and domestic consumption (March 1), the monthly report on the labor market with new jobs, unemployment and wages (March 2) and the non-manufacturing PMI index ( March 5th).

It means, in my opinion, that we can expect more volatility in the near future. It also means that temporary falls in prices, as we have seen before, are possible. This also applies to significant increases with a favorable figure.

However, it is far from certain that US inflation will rise too far in the near future. This is due to the risk of more turbulence on the markets, the fact that the economic expansion is taking a long time and that growth is actually already too high (compared to the pace that the American economy can handle) and this year's parliamentary elections. So I think it is unlikely that the Fed will raise interest rates more than 3 times this year.