The Federal Reserve is getting ready to welcome a new chairman amid doubts and divisions among policy makers about how many times to raise interest rates this year.
Jerome Powell will take over from Janet Yellen in early February, if he is confirmed by the Senate as expected. He will lead a policy-making committee that, judging by a record of its last meeting released on Wednesday, still thinks the gradual pace of tightening it followed last year is correct. But the debate also highlighted a split between officials concerned about low inflation and others pointing to robust growth about to get a further boost from tax cuts.
Most participants reiterated support for “continuing a gradual approach to raising the target range” for the benchmark policy rate, according to minutes of the Federal Open Market Committee’s Dec. 12-13 meeting, at which officials voted to raise rates by a quarter point.
Still, the minutes lacked an explicit signal for a rate hike in the first quarter. There was a lengthy debate about reasons to speed up, or slow down, the pace of tightening depending on what happens to inflation, which remains below their 2 percent target. But the median of their quarterly forecasts remained for three hikes in 2018, unchanged from September.
The FOMC meets at the end of January and March 20-21. Pricing in interest-rate futures imply investors see a more than 70 percent probability of a move by the March meeting.
“They just threw up their hands and said, ‘We are going to have to wait and see,”’ said Michael Hanson, chief U.S. macro strategist at TD Securities USA in New York. “I don’t know if they are going to get enough evidence by March to make a strong enough case” for a rate hike.
Among the 16 interest-rate forecasts forecasts submitted by policy makers, six wrote down a preference for policy rates below the 2018 median target range of 2 percent to 2.25 percent, which was maintained by six of their colleagues. A further four saw rates higher than the median by the end of the year.
|
What Our Economists Say “While the prevailing sentiment was that inflation was due to return toward target over the medium term, there appeared to be only limited concerns that an excessively lean labor market could lead to a difficult to contain overshoot. Notions among some Fed watchers of a Powell-led FOMC taking a more hawkish tack appear to be overblown.”- Carl Riccadonna, chief U.S. economist, Bloomberg EconomicsFederal Reserve Minutes Suggest New and Old FOMC Not Dissimilar |
A week after the FOMC meeting, lawmakers passed a $1.5 trillion cut in corporate and personal taxes. President Donald Trump signed the bill into law on Dec. 22.
Fed officials saw several forces that could result in a faster pace of rate increases. “These risks included the possibility that inflation pressures could build unduly if output expanded well beyond its maximum sustainable level,” owing to fiscal stimulus or “accommodative” financial conditions, the minutes said.
“They noted a lot of uncertainty about the effects of the tax policy changes on the economy,” said Laura Rosner, senior economist at Macropolicy Perspectives LLC in New York. “FOMC participants appear to have low conviction about the magnitude of the effects.”
Policy makers continued to wrestle over the outlook for inflation, the minutes showed. Economists were surprised in 2017 by the failure of wages and prices to rally despite a strengthening job market. Even as unemployment dropped to 4.1 percent, the Fed’s preferred measure of inflation dipped to as low as 1.4 percent, before rebounding to 1.8 percent in the 12 months through November.
Fed officials said the pace of rate hikes could be slower if inflation failed to move up toward their 2 percent target. “While participants generally saw the risks to the economic outlook as roughly balanced, they agreed that inflation developments should be monitored closely,” the minutes said.
That sentiment echoed Powell, who said during his Senate confirmation hearing Nov. 28 that the committee was debating if low inflation was due to transitory, or longer-lasting headwinds.
“We’ll have to be guided by the data as they come in,” Powell told lawmakers. “That’s what will dictate the path of our policy.”
To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net.
To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Brendan Murray
©2018 Bloomberg L.P.
