US Fed on lookout for recession but still sees strong economy

US Fed on lookout for recession but still sees strong economy

While not forecasting a recession, Fed officials said they were monitoring changes in market-set interest rates.

While highlighting a strong economy, Fed officials appeared vigilant about emerging risks, especially trade tensions, and the dangers of an economy that might overheat.

"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", according to the minutes from the Fed's June 12-13 meeting.

The Federal Reserve raised interest rates for the second time this year in its June meeting, amid concerns of a lurking global trade war, sparked by President Donald Trump's relentless stance on tariffs. It was the second rate hike this year and the seventh since December 2015.

"Most (Fed policymakers) noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects", according to the minutes. Fed officials also increased their projection for the number of rate hikes they plan to make this year from three to four.

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In the Fed's latest projection, the neutral rate stood at 2.9 percent.

Because of this expected trajectory, a number of officials suggested at the meeting that it might soon be appropriate to drop the language in the policy statement indicating that the stance of monetary policy "remains accommodative". He said the following week that, in principle, " changes in trade policy could cause us to have to question the outlook", adding that business contacts were telling the Fed it might be a reason to delay investment or hiring.

With Friday marking the start of the imposition of tariffs by the United States government on more than 800 Chinese products, as well as counter-tariffs from the Chinese on U.S. products, the Fed's observations suggest that fears over the escalating conflict are already having a significant effect on the USA business climate.

Many of the Fed's contacts across the economy said they were anxious that a recent increase in tariffs levied by the United States and its trading partners was weighing on investment, according to the minutes' summary of policymaker discussions. Canada and Mexico have already slapped new taxes on USA goods, while the US and China are to levy duties on each other's products worth some $34 billion.

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