FOMC Debated Risks of Gradual Rate Hikes
$DIA, $SPY, $QQQ, $VXX
At the December 2016 meeting the FOMC officials focused on the impact of potential fiscal stimulus, with many starting to worry that the central bank might eventually be forced to quicken the pace of interest-rate increases to head off higher inflation.
Most of the participants “indicated that the upside risks to their forecasts for economic growth had increased as a result of prospects for more expansionary fiscal policies in coming years,” read the minutes of the December 13-14 meeting of the Federal Open Market Committee (FOMC), released Wednesday in Washington, DC.
Despite growing attention to the risks of fiscal policy spurring faster growth than currently forecast, most on the committee reiterated that a “gradual” pace of rate hikes over the coming years would likely remain appropriate.
The minutes of the policy meeting, at which officials raised their benchmark lending rate by a quarter percentage point, showed that uncertainties over future fiscal policies weighed heavily in their discussion of the economy and the future path of monetary policy.
“Participants emphasized their considerable uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate demand and supply,” the minutes said.
The committee was divided on how far unemployment was likely to fall, and over the consequences for inflation if it fell significantly below the Fed’s goal.
“Many participants” judged the risks of a sizable undershoot on unemployment had increased somewhat, according to the minutes. Still, “most participants” expected the jobless rate would fall only “modestly below their estimates of the longer-run normal rate.”
The minutes showed that “about half” of the committee members had begun to incorporate assumptions about expansionary fiscal policy into their forecasts.
Among officials still emphasizing the downside risks to the economy, some mentioned the headwinds created by an appreciating USD.
A stronger USD hurts growth by making US exports less competitive and slows inflation by making imports cheaper.
At their December meeting, Fed officials raised the number of 0.025% rate hikes they foresee in Y 2017, to 3 from 2, while signaling growing confidence in the economy, according to their median estimate.
Unemployment declined to 4.6% in November, its lowest mark in more than 9 years and close to most economists’ estimates for the its lowest sustainable level.
The Fed’s preferred measure of price inflation was 1.6% in the 12 months through November after excluding food and energy components. Policy makers expect that to rise this year toward their 2% goal.
The FOMC holds eight scheduled meetings a year, with the next session slated for January 31-February 1.
President Elect Donald Trump promised higher spending on infrastructure, tax cuts and regulatory reform during his campaign, His inauguration is set for January 20th.
Wednesday, the major US stock market indexes finished at: DJIA +60.40 at 19942.29, NAS Comp +47.92 at 5477.00, S&P 500 +12.92 at 2270.75
Volume: Trade was heavy with 1.19-B/shares exchanged on the NYSE
- Russell 2000 +2.2% YTD
- DJIA +0.9% YTD
- S&P 500 +1.4% YTD
- NAS Comp +1.7% YTD
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