The Federal Open Market Committee published the minutes from its latest meeting Thursday, with some members expressing concern "that a prolonged period in which the economy operated beyond potential could give rise to heightened inflationary pressures or to financial imbalances that could lead eventually to a significant economic downturn."
Nearly all officials felt comfortable continuing to raise interest rates on a regular basis in response to those qualms, even amid growing trade tensions and a flattening yield curve.
"The plan is on: Gradual increases in rates is still what’s on the table," said Putri Pascualy, managing director and credit strategist at PAAMCO. "There’s a lot of talk about the improvement in the economic story and strength in the labor market. But the third pillar, inflation ... despite the strength in the labor market and economy, inflation is just right about where they want it to be."
At their last meeting, the Fed decided to increase its benchmark short-term interest rate by a quarter percentage point. In addition, the central bank signaled that two more rate hikes were expected to occur by year-end. The central bank did, however, note possible negative repercussions from the growing trade dispute between the U.S. and its economic allies — specifically any widespread reduction in business investment as a result of uncertainty.
"The risk of trade policy and specifically tariffs has been identified as the one key factor that could derail the economic engine," Pascualy added. "The Fed seems less concerned about the economic impact of the tariffs themselves. What is potentially important is the impact on confidence – it could change peoples' or businesses’ plans on investment."
Wall Street will likely be watching for any foreign response when the U.S. slaps $34 billion worth of tariffs on China on Friday; Beijing is expected to implement the same amount in counter-duties.
Jobs in the U.S. rose by 177,000 in June, ADP and Moody's Analytics reported Thursday, while economists polled by Thomson Reuters expected a gain of 190,000. June marked the fourth straight month of jobs growth below 200,000. Jobs growth for the previous month, however, was revised up by 11,000 to 189,000, mitigating the impact.
Meanwhile, the number of Americans filing for unemployment benefits unexpectedly rose last week, though overall trends continued to suggest a tight labor market.
Initial claims for state unemployment benefits increased 3,000 to a seasonally adjusted 231,000 for the week ended June 30, the Labor Department said on Thursday.