US central bankers said the recent tax cuts could juice the economy more than expected in the near term, meaning that further interest rate hikes would likely be needed, according to meeting minutes released on Wednesday.
However, the minutes showed a split on the Federal Reserve’s policy-setting committee, with some officials saying that the central bank can afford to be patient in raising the benchmark lending rate, according to the minutes of the Jan. 30 to 31 meeting.
The Fed did not increase the key interest rate at last month’s meeting and indicated three rate hikes are expected this year. However, that was before the strong January employment report spooked markets due to the fear that the Fed would have to raise rates faster to head off inflation. Many economists now expect four moves for this year.
The minutes’ language spooked markets again, as Wall Street, which was in positive territory most of the day, tumbled after the report was released.
Most Asian markets sank yesterday, fueling fears of fresh volatility after the minutes fanned expectations that US interest rates would rise further.
Participants in the policy-setting Federal Open Market Committee (FOMC) meeting pointed to the tax cuts and improved global economic outlook as factors supporting US growth this year, and many upgraded their forecasts, even while cautioning that the effect of the tax cuts is not yet clear.
A number of members noted that “the effects of the recently enacted tax changes — while still uncertain — might be somewhat larger in the near term than previously thought,” the minutes said, adding that as a result, the “stronger outlook for economic growth raised the likelihood that further gradual upward policy firming would be appropriate.”
The first rate increase of the year is expected at next month’s FOMC meeting, which would be the first led by newly installed Fed Chair Jerome Powell, and is to be followed by his first news conference.
There continue to be skeptics on the FOMC as “some participants” cautioned that inflation, stubbornly low last year despite solid economic growth and falling unemployment, could continue to fall short of the Fed’s 2 percent goal.
There was an absence of “significant wage or inflation pressures,” the members said, adding that the central bank “could afford to be patient in deciding whether to increase” the benchmark interest rate.
That would “allow participants to assess whether incoming information on inflation showed that it was solidly on track toward the committee’s objective,” they said.
However, a number of members said the continued strength in hiring “was likely to translate into faster wage increases at some point.”
The January job report included a 10-year record in wage gains after months of only tepid increases, further boosting the sense on markets that the central bank would have to be more aggressive.
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