FOMC Sees Future Interest Rate Hikes Guided by Inflation
- December FOMC Minutes suggest more rate hikes coming
Fed policymakers showed worry over the fate of currently low inflation and saw recent tax changes as providing a boost to consumer spending, according to the minutes of the FOMC’s last policy meeting on 12-13 December released Wednesday.
The details of the meeting, at which the Fed raised interest rates for the 5th time since the Y 2008 financial crisis, also showed that officials have a lack of certainty over the impact of fiscal stimulus on raising price pressures.
“Most participants reiterated their support for continuing a gradual approach to raising the target range, noting that this approach helped to balance risks to the outlook for economic activity and inflation,” the Fed said in the minutes.
They then discussed the dual possibilities that The Trump Administration’s tax cuts or easy financial conditions could cause inflation pressures to build unduly, while at the same time also considering that actual or expected inflation may fail to rise to the Fed’s 2% target.
The inflation shortfall is set to dominate incoming Fed Chair Jerome Powell’s 1st few months at the central bank with further rate increases more difficult to justify without an upswing. He is set to take over from Janet Yellen by the time of the next rate-setting meeting on 31 January
At the December meeting
The Fed kept its forecast for three rate rises this year and in Y 2019 unchanged even as policymakers anticipated a short-term boost in US economic growth from The Trump Administration’s sweeping $1.5-T tax overhaul signed into law on 22 December.
The tax changes reduce the corporate rate from 35 to 21% and cuts the taxes paid by most individuals as well.
In the minutes, many policymakers “expected the proposed cuts in personal taxes to provide some boost to consumer spending” and many characterized the changes in business taxes as likely to provide a modest boost to capital spending.
“However, some business contacts…noted that the increase in cash flow that would result…was more likely to be used for mergers and acquisitions or for debt reduction and stock buybacks,” the minutes said.
In December, the Fed forecast ultra-low unemployment of below 4% in Y’s 2018 and 2019, but still predicted inflation would remain below 2% at the end of Y 2018.
The mystery of low inflation in such a robust economy has prompted debate at the Fed for the past several months and was the concern of the two policymakers who voted against a rate increase at last month’s meeting.
The latest FOMC minutes showed that while participants generally viewed inflation rising back to target over the medium term, several said “other persistent factors may be holding down inflation.”
Investors have all but ruled out an interest rate increase at the FOMC’s upcoming meeting but currently see another raise in March.