US Fed says tax cuts could boost economy more than expected

US Fed says tax cuts could boost economy more than expected

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

WASHINGTON: US central bankers said the recent tax cuts could juice the economy more than expected in the near term, meaning further interest rate hikes likely will be needed, according to meeting minutes released on Wednesday (Feb 21).

But the minutes also revealed a split on the Federal Reserve's policy-setting committee, with some officials saying the central bank can afford to be patient in raising the benchmark lending rate, according to the minutes of the Jan 30-31 meeting.

The Fed did not increase the key interest rate at last month's meeting, and indicated three rate hikes are expected this year. However, that was before strong January employment report was released, spooking markets due to the fear the Fed will have to raise rates faster to head off inflation. Many economists now expect four moves in 2018.

The language in the minutes spooked markets again, as Wall Street, which was in positive territory most of the day, tumbled after the report was released.

Participants in the policy-setting Federal Open Market Committee (FOMC) meeting pointed to the tax cuts and the improved global economic outlook as factors supporting US growth this year, and many upgraded their forecasts, even while cautioning that the impact of the tax cuts is not yet clear.

A number of members noted that "the effects of the recently enacted tax changes - while still uncertain - might be somewhat larger in the near term than previously thought," the minutes said.

As a result, the "stronger outlook for economic growth raised the likelihood that further gradual upward policy firming would be appropriate."


The use of the term "further" was the subject of intense debate among economists, with some doubting whether the term indicates the Fed will continue as it has, or speed up the pace of rate hikes.

However, the minutes explain that the central bankers purposely used the term to "update" their description of the likely path of the rate used to set all kinds of lending from car loans to mortgages.

The first rate increase of the year is expected at the March FOMC meeting, which will be the first led by newly-installed Fed Chair Jerome Powell, and will be followed by his first press conference.

The Fed offered an upbeat outlook for the economy "suggesting full steam ahead for a rate hike next month," Joe Manimbo of Western Union Business Solutions said in a research note.

"While the minutes stopped a bit short of introducing the risk of a faster pace of rate hikes this year, they didn't quash that view either," he said.

There continue to be skeptics on the FOMC as "some participants" cautioned that inflation, stubbornly low last year despite solid economic growth and falling unemployment, could continue to fall short of the Fed's two percent goal.

They noted the absence of "significant wage or inflation pressures," and said the central bank "could afford to be patient in deciding whether to increase" the benchmark interest rate.

That would "allow participants to assess whether incoming information on inflation showed that it was solidly on track toward the committee's objective."

But a number of Fed members noted that the continued strength in hiring "was likely to translate into faster wage increases at some point."

In fact the January job report included a 10-year record in wage gains after months of only tepid increases, further boosting the sense on markets that the central bank will have to be more aggressive.

Source: AFP/de