Economic conditions have been improving and the stock market has shown continued momentum with new highs from all of the major indexes in recent weeks. On Wednesday, the Federal Open Market Committee released its July meeting minutes closely watched by investors for indications of the Fed’s next move.
A breakdown of the Fed minutes shows that the Brexit occurrence on June 23 influenced the FOMC’s decision on rates and outlook on the global economy at its July meeting. However, as expected the affects from Brexit have been subdued with the longer-term affects primarily being downward pressure on fixed income rates.
The Fed’s July FOMC meeting minutes mainly showed that the economy was on a more normal path. Labor market conditions improved significantly in the most recent labor market report with June payrolls up 287,000 and the unemployment rate at 4.9%. July payrolls followed with another strong increase of 255,000 and no change in the unemployment rate.
The latest reading on GDP was as expected at the end of July with a SAAR of growth for the second quarter of 1.2% after an increase of 0.8% in the first quarter.
Inflation is also stable with the PCE Index at 0.9% annually. The PCE Index, excluding food and energy, is also approaching the Fed’s 2% objective at 1.6%.
Given that the purpose of raising rates now is primarily to alleviate previous policy accommodations, the Fed is not necessarily in a position to act with urgency. As a result, the increase in rates in the months ahead will broadly be minimal and are more for the purpose of bringing rates to a more normalized level. Under current circumstances, the Fed could raise rates in September or December.
On Thursday stocks gained led by higher valuations in the Dow Jones Industrial Average from Exxon (XOM, Financial) and Chevron (CVX, Financial) as an increased focus turns to oil prices and the energy sector.
As for the federal funds rate, Robert Kaplan gave great insight on Thursday, in a speech in Dallas, where he noted that the Fed has limited room to adjust rates. With the current federal funds rate at 0.25% to 0.50% the Fed’s next rate increase will likely be to a range of 0.50% to 0.75%. For the quarters ahead, 25 basis point rate increases will likely be the norm as the Fed normalizes policy at a slow pace. Given the slow pace of rate increases, the affects of these policy changes will likely be minimal overall for investors with only a slight improvement to fixed income yields in the U.S. market.
A CNBC report Friday provided greater insight into Kaplan’s speech Thursday, highlighting the marginal increases to be expected from the Federal Reserve.
Disclosure: I do not own shares of any stocks included in this article.
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