The Federal Open Market Committee released its June 12 to 13 meeting minutes on Thursday, July 5. Equity markets pulled back from some of the day’s gains following the release as the minutes showed some higher risks globally than immediately identified following the meeting’s press conference. Another development identified from the meeting minutes was a new recession indicator, which was presented at the June meeting.
Trade agreements
Since the middle of June, when trade tensions increased and new trade terms were introduced, the Treasury yield curve has seen some significant changes. Through June, shorter-term Treasury yields have increased with the Fed’s new federal funds target rate of 1.75% to 2%. The longer end of the Treasury curve has seen Treasury yields decrease. Thus, trade tensions appear to be having some modest effects on the longer end of the curve. Meanwhile, the shorter end of the curve appears to be less affected as the Fed reported its second short-term federal funds rate increase in 2018 and continues to plan for one or two more rate increases through the end of the year.
The June Fed minutes appear to show that the FOMC’s members felt trade tensions “had intensified” downside economic risks. However, Federal Reserve Chair Jerome Powell’s press conference comments, backed by the Fed’s economic indicators, suggest that trade discussions have not impacted reported gross domestic product inventory or inflation. Fixed-income market pricing seems to support this with substantial market yield decreases occurring in the five-plus maturity area.
Source: US Treasury
New recession indicator
Also of note from the Fed’s June minutes was a new recession indicator presentation. Theory suggests that an inverted yield curve is one of the greatest signs of a recession – marked by the difference in the two- and 10-year Treasury. The June presentation discussed a recession indicator that would take into account forward looking projections of the federal funds rate as implied from futures market prices. In effect, the new recession indicator would focus on the spread between the current federal funds rate and a future federal funds rate market projection.
Savings rates and treasury ETFs
The Fed’s June rate increase and subsequent discussions appear to show that trade tensions could begin to affect gross domestic product growth and potentially inflation, but through the remainder of 2018 these indicators appear to remain elevated. As such, the Fed is still likely to increase the short-term federal funds rate one or two more times in 2018. The Fed’s outlook continues to remain positive for cash and short-term savings rates, which are seeing higher yields.
Source: Charles Schwab
Source: Morningstar
Disclosure: I do not currently own any of the investments included in this article.
