Fed's Williams Sees Three-Hike 2017 Outlook as 'Very Reasonable'

Jan 06, 2017, 00:30
Fed's Williams Sees Three-Hike 2017 Outlook as 'Very Reasonable'

United States officials have said they might have to increase the pace of interest rate hikes if Donald Trump's stimulus programme threatens to pump up inflation.

Chair Janet Yellen said the USA central bank was "operating under a cloud of uncertainty".

Here are a couple of takeaways from the Fed minutes.

That came as some surprise since the quarterly economic forecasts did not change appreciably, and it was seen as the Fed's first reaction to Trump's Nov 8 election. In light of that, "many participants judged that the risk of sizable undershooting of the longer-run normal unemployment rate had increased somewhat and that the Committee might need to raise the federal funds rate more quickly than now anticipated to limit the degree of undershooting and stem a potential buildup of inflationary pressures".

Nearly all Federal Reserve policymakers thought the economy could grow more quickly because of fiscal stimulus under the Trump administration and many were eyeing faster interest rate increases, minutes from the central bank's December meeting showed. The Fed's preferred measure of inflation, the core personal consumption expenditure index, is now around 1.7 per cent.

With the USA economy close to full employment, the Fed thought that it needed to act to "normalize" rates, starting "gradually", according to Yellen.

President-elect Trump campaigned on promises to cut taxes, eliminate regulations and boost spending on defense and infrastructure to stimulate economic growth.

At the time, with unemployment low and government debt forecast to rise beyond the current 77 per cent of GDP, Dr Yellen said "at this point fiscal policy is not obviously needed to provide stimulus to help us get back to full employment".

"A portion of the committee was convinced that fiscal stimulus is coming in 2017 and baked that into their forecasts".

The Fed raised the overnight Fed funds target rate by 0.25 of a percentage point to a range of between 0.50 and 0.75 per cent last month.

The Fed seems likely wait to see the timing and shape of any reforms in Washington.

Despite these risks, the minutes repeatedly said the central bank expects it can continue to make only "gradual adjustments" in the interest rate, although they emphasized the need to adjust course "as economic conditions evolve".

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