Talking Points:

  • The Fed’s update covered a host of economic developments, but expressed concern over trade tensions
  • It expects further gradual rate hikes to be consistent with goals
  • Group reported low vulnerability for the financial sector, as banks begin to report earnings
  • Believes drag on the economy from increased oil prices will be quite low

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The Federal Reserve issued their monetary policy report to Congress, offering insight on future rate hikes and economic expectations while highlighting concerns over domestic and global risks - like the pressure from trade tensions and rising oil prices. The central bank expects rate hikes to continue at a gradual pace, with the outlook for higher inflation on track. Similarly, as bank earnings kick off this week and with stress tests behind us, the report saw little vulnerability for the financial sector due to leverage. Although the Fed seems to be comfortable with rate hikes and economic stability, they did highlight some growing global risks.

Speaking to a familiar concern, trade tensions were a noteworthy highlight for concerns more frequent reference among policy members speeches and in official group updates. The concern comes a few days after the US announced $200 billion of further tariffs on China, a steep escalation in the ongoing trade war. At this time however, the Fed has not issued any indication that the trade war will have a material impact on rate hikes, but concern is growing. On the other hand, their concern over rising oil prices seemed to be relatively sedate. The policy authority believes the current trend of rising oil prices will have a minimal drag on the economy compared to past eras of high prices. Despite offering some insight on the Fed’s attitude toward the domestic and global economy, the report did little to affect markets.

Friday morning saw the S&P 500 lose modest ground through the open. Those loses would not compound however, and a lackluster recovery began ultimately leaving the market with little sense of conviction to either the bulls or the bears. The Dollar has forged a more significant performance on the day with the attempt at an advance giving way to a deeper retreat for the session. Moving forward, the escalation of trade tensions should continue to appear in Fed reports as tariffs remain in place. Next week, Fed Chairman Jerome Powell will deliver a semi-annual testimony before a Senate panel, an event to look to for further Fed insight.

Chart 1: S&P 500, 5-Minute July 13

Fed Monetary Policy Report Expresses Worry Over Trade Wars

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Chart 2: US Dollar Basket, 5-Minute July 13

Fed Monetary Policy Report Expresses Worry Over Trade Wars

---Written by Peter Hanks, DailyFX Research