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Fed members content with economic performance, but trade concerns loom

Federal Reserve Chairman Jerome Powell
Federal Reserve Chairman Jerome Powell

After keeping the federal funds rate unchanged at its July 31-Aug. 1 meeting, members of the Federal Open Market Committee indicated they will likely raise rates next month, according to meeting minutes released Wednesday.

The seven committee members who attended the two-day meeting kept the funds rate to a range of 1.75% to 2%. Committee members raised the rate 25 basis points in June, which was the second increase this year. It's expected to raise rates two more times in 2018.

However, Douglas Cote, chief market strategist for Voya Investment Management, expects one more rate hike it 2018. He anticipates another 25-basis-point hike in September and then thinks the Fed will hold steady at a neutral level for the rest of the year, which, he added, would mean "there's no reason to raise rates in December … the market's going to love it."

Committee members cited a strong labor market, a rise in household spending and inflation near its objective as reasons to stay the course with respect to rate hikes, according to the meeting minutes.

But members also mentioned risks and uncertainties associated with their outlook for economic activity, the labor market and inflation over the medium term. All participants agreed that ongoing trade disagreements and proposed trade measures represent a source of uncertainty and risk, the minutes showed.

"Participants observed that if a large-scale and prolonged dispute over trade policies developed, there would likely be adverse effects on business sentiment, investment spending and employment," the minutes said. "Moreover, wide-ranging tariff increases would also reduce the purchasing power of U.S. households."

The committee will meet next on Sept. 25 and 26.