Federal Reserve policymakers at their recent meeting all saw a stronger US economy as well as a higher inflation over the coming months, a progress that could influence how much they hike interest rates in the coming years.
Minutes from the March 20-21 policy meeting of the Federal Open Market Committee (FOMC) showed that all participants were confident both the economy and inflation will improve in a way that would justify further gradual increases in the federal funds rate.
Fed Sees More Rate Hikes to Contain Inflation
The Fed’s target range for its lending rate is currently between 1.50 and 1.75 percent, though a few members grew concerned and believed that it would be better to have more proof that inflation was moving towards the central bank’s 2 percent target.
That raise was the sixth quarter-point move since the central bank started tightening policy in December 2015.
Inflation rate is currently at 1.6 percent and has fallen short from the 2 percent goal for six years, but several indicators lately suggested higher price pressures.
Fed Chair Jerome Powell stated last week that the Fed will likely need to continue raising interest rates this year to control inflation.
The bank expects two more rate hikes in 2018, but quarterly forecasts at the last meeting showed most of the officials favoring another three rate increase this year. Markets also anticipate rate rises in June and possibly in September.
Traders see a 90 percent chance for a rate hike in June, while they price in about a 75 percent chance for a third rate hike in December. The Fed is expected to maintain rates at its next meeting on May 1 and 2.
Fed Sees Stronger US Economy
Along with the rate rise came positive adjustments to FOMC’s forecast for gross domestic product (GDP) growth. Fed now expects GDP to rise by 2.7 percent in 2018 and 2.4 percent in 2019, which are both higher than the previous respective estimates of 2.5 percent and 2.1 percent in December.
Fed policymakers also see larger profits in industrial production, as well as manufacturing and services during the first part of the year, while consumer spending was expected to slow down because of short-term factors.
In addition, officials believed that the $1.5 trillion income tax cut package, along with the $1.3 trillion spending bill, would provide a boost.
Moreover, committee members expect further momentum from an economy in which the labor market is tightening, the dollar failing, the stimulus from a $1.5 trillion tax cuts, and bigger government spending yet to affect the economy.
Core consumer price index on Wednesday was up by 2.1 percent on a yearly basis in March, marking its highest since February 2017, after gaining 1.8 percent during that same month.
One exception to the optimistic outlook however, was the risk of a full-scale trade war. The back-and-forth tariffs worth tens of billions of dollars between the US and China has become a potential problem for Fed, given its capacity to damage US growth and increase consumer prices.
Tensions between the two countries have disconcerted financial markets, American business, and investing communities over possible impact to global expansion.
Minutes stated that officials did not view the tariffs as likely to have a significant effect on the national economic outlook, but deemed retaliatory trade actions and other trade policies-related factors as a weakness for the US economy.
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