Here’s the information you need to know from key articles and news reports for the week of August 23rd, 2018.

TREASURIES OUTLOOK – Fed minutes boost expectations of 2 more 2018 rate hikes (source)

  • Futures traders priced in a slightly higher chance that the FED will increase interest rates 2 more times this year, after minutes from its latest meeting showed that US central bankers discussed raining interest rates soon to counter excessive economic strength.
  • “many suggested that if the incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodations”
  • Likely to raise rates at September meeting and likely again in December
  • The odds of a September hike rose to 96% after the minutes, from 94% on Tuesday, while expectations of a December rate rise increased to 66%, up from 61%.
  • Bonds were big earlier on Wednesday as investors weighed how a guilty plea by Trumps lawyer and the conviction of his campaign manager will affect his presidency
  • Trade tension also contributed to safety buying

UPDATE 1 – Fed officials suggest rates likely to rise soon, worry about trade war (source)

  • Raising interest rates soon to counter excessive economic strength.
  • Also examined how global trade disputes could batter business and households
  • Fed concerned that economy is so strong that inflation could rise persistently about its 2% target
  • Policy makers held an ample discussion about the risks to the economy from simmering trade tensions.
  • “all participants pointed to ongoing trade disputes as an important source of uncertainty and risks” from minutes
  • Policymakers pointed out that a large prolonged trade dispute could hurt business sentiment, investment spending and employment. Wide-ranging tariff increases would reduce the purchasing power of US households
  • Trump told Reuters on Monday he was “not thrilled” with Powell’s Fed for raising interest rates and said the central bank should do more to boost the economy.


ANALYSIS – Fed bond unwind may be even less thrilling for Trump than rate hikes (source)

  • The central bank is now liquidating tens of billions of dollars each month from it’s $4 trillion stock of Treasury Bonds and mortgage backed securities, lowering demand for those securities, its edged mortgage and other long-term rates higher and made it more expensive to invest.
  • As the Fed allows assets to mature, it will put upward pressure on long-term yields
  • Already happening as mortgage rates rise, and mortgage applications and existing homes sales both fall
  • Short-term interest rates remain low by historic standards. Central bankers are uncertain if it remains as influential as it once was as a tool to manage the economy.
  • Wednesday policymakers indicated they were ready to continue their regular interest rate hikes. They also gave no indication that their balance sheet will change any time soon
  • Since it started in October, around $200 billion in Fed holdings have been eliminated, and officials have offered only the vaguest guidance on how far and long the process should continue.
  • While the current cycle of interest rate increases may be nearing an end, with a pause possible sometime next year, tightening through the balance sheet may run on for years.