Fed policymakers agree
Trump fiscal boost poses inflation risk
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[January 05, 2017]
By Jason Lange and Lindsay Dunsmuir
WASHINGTON
(Reuters) - 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.
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A police officer keeps watch in front of the U.S. Federal Reserve in
Washington October 12, 2016. REUTERS/Kevin Lamarque/File Photo
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 <.SPX> 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.
(Reporting by Jason Lange and Lindsay Dunsmuir; Editing by Paul Simao)
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