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Tax Reform Drove Fed to Raise Economic Forecast, FOMC Minutes Show

By:
James Hyerczyk
Updated: Jan 3, 2018, 20:40 UTC

The Fed said, “That inflation might stay below the objective for longer than currently expected.”

Federal Reserve Minutes

The latest minutes from the Fed’s December meeting, released at 1900 GMT, showed the Federal Open Market Committee (FOMC) expressed growing confidence in the strength of the labor market and the economy, but revealed uncertainties over tax cuts.

The minutes also showed the central bankers debated whether new tax cuts would require them to raise short-term interest rates more aggressively this year, after hiking them three times last year.

Fed officials also expressed growing confidence in the strength of the labor market and the economy more broadly. Since the December 12-13 policy meeting, Congress approved and President Donald Trump signed into law a $1.5 trillion tax cut, which could further undermine the Fed’s efforts to ensure the economy remains on an even keel.

“Participants discussed several risks that, if realized, could necessitate a steeper path of increases” in the benchmark federal-funds rate, according to the minutes. “These risks included the possibility that inflation pressures could build unduly…perhaps owing to fiscal stimulus or accommodative financial-market conditions,” the minutes said.

The Fed said, “That inflation might stay below the objective for longer than currently expected.”

The minutes also showed officials expected the tax changes to boost consumer spending, though the magnitude of any boost remained uncertain. Likewise, officials saw a potential boost to capital spending.

“Most participants indicated that prospective changes in federal tax policy were a factor that led them to boost their projections of real GDP growth over the next couple of years,” minutes from the Fed’s December meeting said.

But the minutes also showed Fed officials weren’t sure how likely it was that the tax changes would induce businesses to invest more and whether companies might instead use higher after-tax profits to reduce debt, buy back stock or acquire other companies. Some business contacts and surveys show “firms were cautious about expanding capital spending in response to the proposed tax changes,” the minutes said.

The minutes also showed officials discussed the recent flattening of the yield curve, or the gap between short-term and long-term yields on government debt. Officials “generally agreed that the current degree of flatness of the yield curve was not unusual by historical standards,” particularly given investors’ estimates that interest rates will rise to a lower equilibrium level than they have in the past. While some officials raised concern that the yield curve might invert, signaling a recession, others noted that the financial sector didn’t express concern about the recent flattening of the curve.

Finally, the FOMC suggested the Fed study new ways to conduct monetary policy given the higher likelihood interest rates will return to zero during the next downturn.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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