Fed policymakers agree Trump fiscal boost poses inflation risk

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By Jason Lange and Lindsay Dunsmuir | WASHINGTON

WASHINGTON Almost all Federal Reserve
policymakers thought the economy could grow more quickly because
of fiscal stimulus under the Trump administration and many were
eyeing faster interest rate increases, minutes from the central
bank’s December meeting showed.

The minutes, released on Wednesday, showed how broadly views
within the Fed are shifting in response to President-elect
Donald Trump’s promises of tax cuts, infrastructure spending and
deregulation.

Policymakers were clear that the outlook for those policies
remained uncertain, but they could, if implemented, stoke higher
inflation which would lead the central bank to raise borrowing
costs more aggressively.

“About half of the participants incorporated an assumption
of more expansionary fiscal policy in their forecasts,”
according to the minutes from the Dec. 13-14 meeting, referring
to the 17 policymakers who participated.

“Almost all also indicated that the upside risks to their
forecasts for economic growth had increased,” the minutes
stated.

The central bank’s policy-setting committee unanimously
raised interest rates last month by a quarter of a point and
policymakers signaled a faster pace of rate increases in 2017
than previously expected. That was seen as the Fed’s first
reaction to Trump’s victory in the Nov. 8 election.

But the minutes showed policymakers might signal an even
more aggressive path of rate increases if inflationary pressures
rose. Trump campaigned on promises to double America’s pace of
economic growth and “rebuild” the country’s infrastructure.

“This is a slightly hawkish set of minutes,” said Paul
Ashworth, an economist at Capital Economics in Toronto.

‘CONSIDERABLE UNCERTAINTY’

Fed policymaker projections released last month pointed to a
labor market heating up to just a little stronger than its
longer-run normal level.

The minutes, however, showed “many participants judged that
the risk of a sizable undershooting of the longer-run normal
unemployment rate had increased somewhat and that the Committee
might need to raise the federal funds rate more quickly.”

At the same time, Fed policymakers “emphasized their
considerable uncertainty” about future economic policy changes.

Trump will take office on Jan. 20 and has yet to outline in
detail his economic policy plans.

U.S. short-term interest rate futures rose slightly after
the release of the minutes but not enough to suggest altered
expectations for the central bank’s rate hike path this year.

Traders continued to price in two rate hikes this year and
slightly less than a 50 percent chance of a third, based on the
price of fed funds futures contracts traded at CME Group’s
Chicago Board of Trade.

U.S. stock prices were largely unchanged by the minutes,
with the Standard & Poor’s 500 index holding a gain of
about 0.5 percent. The dollar weakened against the euro and the
British pound.

The Trump administration is expected to add more so-called
inflation hawks to the Fed’s ranks, which could offset a dovish
tilt this year on the policy-setting committee and rattle a
fragile consensus to go slow on rate hikes.



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