The US Federal Reserve will continue raising interest rates

Sean Reid
February 23, 2018

United States stocks finished lower in a choppy session Wednesday on renewed worries over higher interest rates following the release of minutes from the Federal Reserve's January meeting. The European Central Bank will publish its account of the last monetary policy meeting too. Some members upgraded their forecasts.

Investors have focused more attention on whether the Fed will feel pressure to add an extra rate increase this year and even more next year.

A combination of this rise in inflation expectations and a pick-up in sovereign and corporate issuance since the beginning of the year has weighed on bond yields, the US Fed is expected to issue around $1 trillion of debt this year, double that in 2017. Free two- and four-week trial offers have been extended to InvestorPlace readers.

The minutes of the Fed's January 30-31 discussions showed that the officials were more optimistic about the economy than they had been in December.

I expect the market to move lower here to test its recent lows and pressure new Fed chairman Jerome Powell - which will make his first appearance before Congress in his current role on February 28 - to walk back what looks like increasing hawkishness from the central bank. After peaking at 10 percent in October 2009, the unemployment rate fell rather steadily to 4.1 percent in January-the lowest level, outside of a period from 1999 to 2000, since the 1960s.

Those minutes were from Fed meetings on January 30 and 31. Several cautioned that "imbalances in financial markets may begin to emerge as the economy continued to operate above potential", the minutes said. The Dow finished down 167 points. They need to do this because all their money-throwing antics are working well enough to not only create jobs but now wages rises are starting to happen in the U.S. so the threat of inflation has started to spook financial markets.

"The release of the FOMC (Federal Open Market Committee) minutes has given the dollar a small lift, with confidence expressed that activity and inflation was moving on the right path to merit further gradual rate hikes", said ING's head of currency strategy in London, Chris Turner. A number of participants "indicated that they had marked up their forecasts for economic growth in the near term relative to those made for the December meeting".

"Since then the market is recognizing the meeting happened at the end of January and since then we have had the strong jobs report, the average hourly earnings pickup, the CPI figures and they also said it is going to be appropriate to raise rates".

Noting a rise in business optimism, an increase in business investment, a strengthening labor market and an accelerating pace of economic growth, Quarles said the underlying fundamentals of the US economy are strong.

"It was noted that the pace of wage gains might not increase appreciably if productivity growth remains low", the minutes said.

But officials haven't shown conviction in that outcome, noting companies might instead use higher after-tax profits to reduce debt, buy back stock or acquire other firms.

"Suffice to say, a deviation from our target of a few tenths of 1 percentage point, especially one I expect to fade, does not cause me great concern", he said.

Participants also discussed numerous uncertainties about the outlook.

If the inflation levels spike too quickly, then the Fed will have to raise interest rates pretty quickly and that could hurt the positive outlook for USA economic growth.

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