Will the Economy Determine Fed Rate Increases?

Former Fed Vice Chair Alice Rivlin discusses monetary policy the threat of a trade war and the U.S. budget deficit

Former Fed Vice Chair Alice Rivlin discusses monetary policy the threat of a trade war and the U.S. budget deficit

Minutes from last month's meeting of the Federal Open Market Committee, the Fed's monetary policy-setting group, said that "all participants agreed the outlook for the economy beyond the current quarter had strengthened in recent months". "In addition, all participants expected inflation on a 12-month basis to move up in coming months". "I think the debate rages on whether that means three this year of four this year", said Gennadiy Goldberg, an interest rates strategist at TD Securities in NY. NY time. The central bank's current target is a range of 1.5 percent to 1.75 percent, after the March hike. The increase in March was the sixth rise since the central bank began a tightening cycle back in December 2015.

Fed officials also do not think the USA tariffs on steel and aluminum pose any serious threat to the economy or create additional inflationary pressures. This has spurred the corporate fixed income markets, which in turn has allowed many companies to invest in expansion.

The Fed's preferred measure of inflation now sits at 1.6 per cent and has undershot its 2 per cent target rate for six years but various indicators have recently pointed to an uptick in price pressures. A tight labor market, new federal spending, tax cuts and weaker dollar should lead to greater price pressures.

The details released on Wednesday showed more Fed policymakers believe inflation could well be higher than they now expect.

But the minutes say that a "couple of participants" suggested the Fed would benefit from holding off until a future meeting to raise rates, to wait for more data to confirm evidence that the rate of inflation was approaching the Fed's target of 2 percent annual growth.

Minutes of the Fed's policy meeting, released on Wednesday, showed they still expected the economy to strengthen, as tax cuts and increased government spending provide a boost.

Federal Reserve policymakers at their recent meeting all saw a stronger United States 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.

Several thought it would likely also become appropriate at some point for interest rates to rise above the Fed's longer-run estimate for a time. Although more tariffs have been announced since then, investors will be parsing the minutes for any detail on why the committee reached that conclusion. Those tensions have roiled financial markets over potential damage to global growth. The minutes also show that policymakers "suggested that uncertainty about whether all elements of the tax cuts would be made permanent, or about the implications of higher budget deficits for fiscal sustainability and real interest rates, represented sources of downside risk to the economic outlook". Instead, officials anxious that other countries might take retaliatory actions against the U.S. They noted that farmers were "feeling particularly vulnerable" to retaliation.

Washington set stiff tariffs on many steel and aluminum imports on March 7, which Beijing criticized, saying they would have a "serious impact" on trade.

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