Fed minutes - Debate over inflation, Trump

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06 April, 2017

Most economists believe the USA economy is strong enough to sustain gradual increases in the interest rate, and that the Fed should now shift its focus to restraining emerging inflation.

"The December FOMC meeting is probably the most likely date to introduce this change", said Paul Ashworth, chief USA economist at Capital Economics in Toronto, following the publication of the minutes.

"Higher rates coupled with a smaller balance sheet, now at US$4.5 trillion, depict an outlook of diminishing headwinds on the dollar that could keep its longer run prospects biased higher", said Joe Manimbo, senior market analyst at Western Union Business Solutions.

In March, the Fed raised its benchmark interest rate for the second time in a year and said it expects two more rate hikes this year and three more next year.

The minutes from the Fed's March meeting showed continued uncertainty about how the White House's policies would affect the economy, with only about half of the Fed's voting members incorporating assumptions about fiscal policy into their economic projections.

"While the implications of prospective Fed rate hikes are most likely benign, key features of the current tightening cycle stand in stark contrast to historical experience - and could conceivably lead to more serious market and economic disruption", Oxford Economics said.

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Something else to keep an eye on: whether there was any sympathy for the dissent of Neel Kashkari of the Minneapolis Fed, who favored keeping rates on hold. The minutes showed that several Fed officials thought Trump's stimulus plans wouldn't likely begin before next year.

Policymakers at the Federal Reserve continue to see "considerable uncertainty" about the effects of possible fiscal stimulus from the Trump administration, according to meeting minutes released today.

Most believed Trump's plans had the potential to boost growth.

The expectation of tax cuts and deregulation has sent stock prices rising since Trump's November election victory.

Several Fed officials saw "limited risk of a marked pickup in inflation". The Fed's two goals are to achieve maximum employment and moderate inflation. Others argued that since inflation had run below 2 percent for so long, it would do no harm to allow prices to rise above 2 percent for a time.

While many factors make this effort to raise interest rates different from previous ones, a single challenge stands out: U.S. economic growth, employment, and inflation have consistently disappointed during this lengthy but slow recovery. Fed watchers were not expected such a granular discussion at the meeting, thinking it would wait until the May or June meeting.


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