Minutes of the Jan. 30-31 Federal Open Market Committee meeting released Wednesday showed officials saw a stronger economy than at the end of 2017 and that more rate hikes were in the offing.
The strengthening “increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate.” To convey this message, officials altered their statement to point to “further gradual increases,” according to the minutes.
Markets have become worried that the Trump tax cuts would cause the labor market to overshoot full employment, leading to higher wages and a surge of inflation.
The minutes show that while several officials expected inflation to move higher this year, only “a couple” of officials were worried about the possibility that the economy would overheat.
“The shadow of inflation may have set off the alarm in the markets, but not quite yet with Fed officials, it seems,” said Mike Loewengart, vice president of investment strategy at E*Trade, in an email.
At the meeting, Fed officials agreed to hold rates steady in a range of 1.25% to 1.5%.
The Fed had penciled in three rate hikes at its December meeting. The minutes from January do not indicate whether any officials were pushing for more.
The minutes show that three rate hikes this year “was the base case at the meeting, though they did leave themselves an out” if developments warranted, said Kathy Jones, chief fixed income strategist at Charles Schwab, in a phone interview.
U.S. stocks SPX, >+0.10% initially extended gains after the minutes' release. Gains evaporated toward the end of the session.
“Future policy moves will remain data dependent. It’s a slow news week and the financial press had elevated the importance of these minutes. Hence, some relief (higher share prices) that they are behind us,” said Scott Brown, chief economist at Raymond James, in a note to clients.
The minutes show that most officials thought inflation would move up this year towards the Fed’s 2% target.
The Fed’s staff also forecast higher inflation, saying that core personal consumption expenditure index “would rise notably faster this year” from its 1.5% rate in December.
Still, only a “few” of the Fed’s 12 districts reported that businesses in their regions had pricing power.
And a minority of dovish Fed members thought inflation would continue to “fall short” of the 2% target. They argued that the Trump tax cut might lead firms to cut prices in order to remain competitive or to gain market share.
Source : https://www.marketwatch.com/story/fed-minutes-stronger-outlook-increases-the-chance-of-more-rate-hikes-2018-02-21