Fed Minutes Hint Rate Hike Coming “Fairly Soon”

The main news event on Wednesday was the release of the U.S. Federal Reserve minutes from its January 31-February 1 Federal Open Market Committee meeting. The minutes show that the central bank may be closer to raising interest rates than previously thought.

The documents show that Federal Reserve officials spent most of their time at the meeting discussing the changes brought on by President Trump’s administration – concluding with a strong indication that another hike could come as early as next month.

The Federal Open Market Committee discussed at length the impact from lower taxes and regulations and higher domestic spending under Trump. Members didn’t mention Trump by name but rather the key three factors in his economic policy plans – tax reform, relaxed regulations and aggressive fiscal spending.

FOMC members also took into consideration the high levels of confidence in the business community. With this, they were able to predict that the expected increase in economic growth related to Trump’s policy proposals could push the Fed towards raising rates sooner than previously expected.

“Many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon” if data on jobs and inflation are “in line with or stronger than their current expectations,” or if the risk increased that the Fed might overshoot its goals, the meeting summary stated.

The minutes also said that “a few” members believe raising rates at “an upcoming meeting” would allow the Fed greater flexibility to respond to higher-than-expected economic growth ahead.

The financial markets are forecasting about a 22 percent chance even though the Fed in December forecast three moves could be on the way in 2017. The markets are also saying the first Fed hike is likely in June then again in November or December.

However, today’s minutes suggest that central bank officials appeared ready to take a more aggressive approach.

The minutes also suggest the FOMC may have to change “its communications regarding the anticipated path for the policy rate if economic conditions evolved differently than the Committee expected or if the economic outlook change.”

The key part of the statement seemed to talk about “upside risks” that would come with “more expansionary fiscal policy or a more rapid buildup of inflationary pressures,” as well as the downside risks of an appreciating U.S. Dollar.

Given this assessment, the FOMC said, “Most participants continued to see heightened uncertainty regarding the size, composition, and timing of possible changes to fiscal and other government policies.”