US Fed members divided over rate hikes in 2018

US Fed members divided over rate hikes in 2018

The minutes of the Dec 12-13 policy meeting also showed officials believe the likely benefits of the recently adopted tax cut are highly uncertain.

Exterior view of the US Federal Reserve building in Washington, DC. (AFP/KAREN BLEIER)

WASHINGTON: US central bankers are divided over how fast they will need to raise interest rates next year, given differences over the causes behind the low inflation and wage gains seen to date, a report showed on Wednesday (Jan 3).

The minutes of the Dec 12-13 policy meeting, when the Federal Reserve raised the benchmark lending rate for the third time last year, also showed officials believe the likely benefits of the recently adopted tax cut are highly uncertain.

While the tax cuts could boost spending, there are indications companies are likely to use the windfall for mergers and share buybacks, the minutes said. That is contrary to the arguments its supporters used to back the massive tax package.

The Fed's policy-setting Federal Open Market Committee last month increased the key lending rate to 1.25-1.5 per cent, an increase of a quarter-point on the rate that affects all types of credit from mortgages to car loans.

The Fed's quarterly economic projections also released last month indicated the central bank is likely to raise the federal funds rate three times in 2018 and once in 2019.

However, that is a median forecast and the minutes shed light on the conflicting views among the policymakers, which centers on whether inflation has remained stubbornly below the Fed's two per cent target due to temporary or more enduring factors.

HOW MANY RATE HIKES?

A few FOMC members said three rate increases, while still gradual, would be too fast and "might prove inconsistent with a sustained return of inflation to two per cent."

However, a few others found the pace of rate hikes should be "somewhat faster" than the three signalled in the forecast. They worried that "continued low interest rates risked financial instability in the future, or that the labour market was increasingly tight."

With steady job creation in the past two years pushing the unemployment down to a 17-year low of 4.1 per cent, Fed officials have been perplexed by the low inflation and sluggish wage gains seen so far, but largely attributed them to transitory factors.

The Fed's preferred inflation measure, the Personal Consumption Expenditures price index, remains well below two per cent and shows few signs it will rise soon. The 12-month core PCE, which excludes volatile food and energy prices, has risen just 1.4 per cent.

Two voting members of the FOMC, Charles Evans of Chicago and Neel Kashkari of Minneapolis, dissented from the decision to raise rates last month saying the central bank should wait to see actual wage and inflation increases before raising rates.

Analysts at Barclays said the actual pace of rate increases will depend on inflation this year, but if it does not rise by March "or if the unemployment rate decline stalls out, then the case for a pause in the rate hike cycle strengthens."

UNCERTAIN TAX CUT IMPACT

Last month's policy meeting took place just before the US Congress approved the massive US$1.4 trillion tax package, and many Fed officials noted the potential for the tax cuts to provide some boost to consumer and business spending. However, they highlighted the uncertainty about the magnitude of the impact.

On the business side especially, reports from firms and surveys indicate that "the increase in cash flow that would result from corporate tax cuts was more likely to be used for mergers and acquisitions or for debt reduction and stock buybacks."

Republicans in Congress have said the package - which lowers the corporate tax rate to 21 per cent from 35 per cent - would boost business investment and hiring, while also helping American families.

The Fed forecasts showed central bankers now are looking for faster growth of 2.5 per cent next year, compared to the previous forecast of 2.1 per cent.

Source: AFP/de

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