Published: Thu, January 05, 2017
Research | By Jennifer Evans

Federal Reserve eyes stepped-up rate hikes if growth moves faster

Federal Reserve eyes stepped-up rate hikes if growth moves faster

The latest US Federal Reserve minutes have shown officials at the central bank believe interest rates could be forced to rise higher than expected this year, if tax cuts and aggressive fiscal policy are enacted under President-elect Donald Trump's administration.

The minutes showed that "about half" of the committee members had begun to incorporate assumptions about expansionary fiscal policy into their forecasts. In fact, the Fed has forecasted three more rate hikes of 25 basis points each in 2017 based on expectations of a more expansionary fiscal policy.

Minutes of the December 13-14 meeting show the central bankers thought they might have to be more aggressive in raising interest rates than the "gradual pace" that they have been signaling. Uncertainty lingers among the FOMC participants, however, the minutes stated.

RBC economist Josh Nye said "participants clearly see upside risks to their projections that might necessitate a more rapid withdrawal of monetary policy stimulus". "However, nearly all also 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".

The euro rose 0.8 percent to $1.0486 in its first gain against the dollar this year after the region's inflation accelerated in December at the fastest pace since 2013.

"While the dot-plot is certainly that sensitive, the Chairwoman (Fed Chair Janet Yellen) was unable to walk the market back from the initial bearish response and so we'd be skeptical of any attempts to do so via the minutes", the bank said.

Yellen said that officials did spend time at their December meeting discussing Mr. Trump's economic plans as well as the rally that had occurred on Wall Street following his election, with stock prices hitting record highs.

In a news conference following the meeting, Fed Chair Janet Yellen stressed that the Fed still meant to move rates up at a gradual pace and the timing of future moves would be dependent on how the economy unfolds. Still, minutes showed downside risks to inflation remained in place and a long-term undershooting of the unemployment rate could actually help inflation get to its target level.

Yet with inflation still running below the Fed's target, some officials saw "only modest risk" of a long-run jobless rate that "would create a sharp acceleration in prices".

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