Bond Market Disagrees With Fed Economic Assessment: So Do I


Fed Minutes Show Concern Over Trump's Tariffs in Otherwise Bullish Assessment.

Please consider Minutes of the June 12-13, 2018 FOMC Meeting released today.

Tariff Concern

Many District contacts expressed concern about the possible adverse effects of tariffs and other proposed trade restrictions, both domestically and abroad, on future investment activity; contacts in some Districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy.

Contacts in the steel and aluminum industries expected higher prices as a result of the tariffs on these products but had not planned any new investments to increase capacity. Conditions in the agricultural sector reportedly improved somewhat, but contacts were concerned about the effect of potentially higher tariffs on their exports.

Strong Jobs, Solid Production

The rest of the report was the typical banter of strong jobs, solid industrial production, with a note that "consumer spending appeared to be increasing briskly in the second quarter after rising at only a modest pace in the first quarter."

Weak Housing

The primary negative in the report, other than tariffs pertained to housing.

Residential investment appeared to be declining further in the second quarter after decreasing in the first quarter. Starts for new single-family homes were unchanged in April from their first-quarter average, but starts of multifamily units declined noticeably. Sales of both new and existing homes decreased in April.

Above Trend Growth

In the U.S. economic forecast prepared for the June FOMC meeting, the staff continued to project that the economy would expand at an above-trend pace. Real GDP appeared to be rising at a much faster pace in the second quarter than in the first, and it was forecast to increase at a solid rate in the second half of this year. Over the 2018-20 period, output was projected to rise further above the staff's estimate of its potential, and the unemployment rate was projected to decline further below the staff's estimate of its longer-run natural rate.

Fed Wants to Hike

On the whole, the minutes suggest the Fed wants to hike and will keep hiking right over the edge of the cliff when it reverses rates at a far faster pace than it put them on.

Mike "Mish" Shedlock

Comments (7)
No. 1-7

Who does the Fed fear the most now - overseas bond holders or pensioners?

Mike Mish Shedlock
Mike Mish Shedlock


I suspect they are mostly concerned about tariffs - perhaps even the wrong reason (higher prices vs economic slowdown)


Given that central bankers are the most powerful (and most destructive) force in our world, it'll be interesting to see what action they take if they grow angry at Trump over tariffs. Being too overt would let the public know how dominant they've become, so it seems they would try to apply pressure behind the scenes.


Everybody keeps raving about how “hawkish” this Fed is but in reality the current trajectory is pretty much in line with what the Fed was telegraphing it was going to do back when Yellen was still there. Wake me up when those .25% become .5% or higher. At the current rate it will still take the Fed more than 3 years to get to the previous Fed funds rate peak — if it ever gets there.


I believe the Fed is more than happy to let Trump take all of the blame for the next recession and will just continue to hike in order to have more downside room with rates later. Most people will not place blame on their long term low rate policy followed by the hikes.

If Trump were smart, he would cut all tariffs like Mish suggests and also stop all foreign aid. Let the countries make money through free trade instead of handouts. Poor countries are not helped by dumping money and goods but by growing businesses (SME, micro, etc) and trade. The aid money we save could be used to buffer any short term effects of eliminating tariffs. However, I do not believe Trump knows what he is doing.


I suspect they are concerned with setting yields at a level where government can auction enough bonds to pay for stimulus, however stimulus is probably dead, and when Dems take seats this fall the house GOP will block the next debt ceiling raise and all hell will break out. Yields may fall of their own volition, (due to EM selling) in which case government has no problem setting yield, just attracting buyers. They will selling their paper twenty percent off, ergo the dollar, Rate hikes only serve to invert the YC in that case, and the banks in full revolt against the Fed. A credit crunch will keep the rate hike reversal in neutral. Just watch LIBOR. GOP has every branch of government but they don't own the world.

Global Economics