- The Federal Reserve debated the impact of tax reform on the economy and on how it sets interest rates, minutes of the December meeting showed.
- Most Fed officials favour gradual rate increases. However, some noted that the economy could be about to get a boost from tax cuts, which would necessitate faster rate hikes.
- The Fed expects to raise rates three times in 2018.
Tax reform could move the Federal Reserve to raise interest rates faster than it anticipates, minutes of the Fed’s December meeting showed.
The central bank’s minutes showed that most officials were in favour of continuing to raise borrowing costs slowly. But as the Tax Cuts and Jobs Act moved closer to becoming law, they debated its impact on future rate decisions and on economic growth.
There are “several risks” that could necessitate quicker rate hikes including faster growth, “perhaps owing to fiscal stimulus [tax reform] or accommodative financial market conditions,” the minutes said.
Fed officials forecast that gross domestic product in 2018 would be at a median of 2.5%, short of the projections of up to 3% that Trump administration officials have made. But most Fed members raised their expectations for growth because of tax reform, the minutes said.
Lower taxes means Americans will extra cash to spend, which would be good for the economy. Just how much more they decide to spend is still uncertain for the Fed. On the corporate side, business owners who were surveyed said some companies would use the extra cash to expand their businesses, but most would likely use it to pay down debt or buy back their stock.
In December, the Fed raised its benchmark federal funds rate by 25 basis points to a range of 1.25% to 1.50%, as had been widely expected. The Fed hinged its decision on the US economy’s better-than-expected growth and strong job creation. It expects to raise rates three times this year.
Persistently weak inflation would be one reason to slow down the pace of rate hikes, the minutes showed.
Some members of the Federal Open Market Committee have attributed weak inflation to technological changes, and the fact that the low unemployment rate is not generating the kind of demand and price increases it theoretically should.
But some officials including the Chicago Fed’s Charles Evans and the Minneapolis Fed’s Neel Kashkari voted against raising interest rates partly because inflation remains short of their 2% target.