MNI FOMC Min:Better Near-Term Outlook Ups Likelihood of Hikes>

--'Further Gradual Increases' Reflects Increased Upside Risk

--Effect of Tax Changes Might Be Somewhat Larger Than Thought 

--Inflation Expected to Rise This Year, Helped by Weaker Dollar

By Jean Yung

     WASHINGTON (MNI) - Federal Reserve officials noted in their January 

meeting that a stronger outlook for economic growth in the near term 

raised the likelihood that further gradual tightening would be 

appropriate, minutes of the meeting released Wednesday showed, sending 

a strong signal that a March interest rate increase was on the table. 

     Voting members of the Federal Open Market Committee "agreed that 

the strengthening in the near-term economic outlook increased the 

likelihood that a gradual upward trajectory of the federal funds rate 

would be appropriate," the account said. 

     "They therefore agreed to update the characterization of their 

expectation for the evolution of the federal funds rate in the 

postmeeting statement to point to 'further gradual increases' while 

maintaining the target range at the current meeting."

     A number of officials marked up their forecasts for economic growth 

in the near term relative to those made for the December meeting in 

light of strong economic data in the United States and abroad, 

accommodative financial conditions, and "information suggesting that the 

effects of recently enacted tax changes -- while still uncertain -- 

might be somewhat larger in the near term than previously thought," the 

minutes said. 

     The FOMC raised the federal funds rate to a 1.25% to 1.50% target 

range on Dec. 13 and maintained that range in the January meeting. 

Though several voting members saw increased upside risk to the near-term 

outlook, the FOMC generally "continued to judge the risks to that 

outlook as remaining roughly balanced." 

--TAX CUT BOOST 

     Businesses in various Fed districts cited the tax cuts and 

improvements in the global economic outlook as factors behind their 

general optimism about the economy, officials said. Many business 

contacts reported plans to increase investment to expand capacity. 

     Still, several officials "expressed considerable uncertainty 

about the degree to which changes to corporate taxes would support 

business investment and capacity expansion," the minutes said. 

     More importantly, firms might be using part of their tax savings 

toward issuing one-time bonuses rather than a permanent wage increase, 

a few officials said. 

     That would not serve to boost wage growth, which has been notably 

sluggish even as the economy runs hotter than its trend pace, officials 

said. They continued to note "few signs" of any broad pick-up in wage 

growth. 

--INFLATION TO RISE

     A few Fed officials suggested that the recently enacted tax cuts 

could actually lead firms to cut prices in order to remain competitive 

or to gain market share, which "could result in a transitory drag on 

inflation." 

     At the same time, several officials said they expected a lower 

dollar in recent months would help return inflation to 2% over the 

medium term. 

     Generally, officials said they expected inflation to rise gradually 

as resource utilization tightened further and as wage pressures became 

more apparent, the minutes said.      

     A minority of FOMC officials, presumably including Chicago Fed 

President Charles Evans and Neel Kashkari of Minneapolis, who dissented 

against the December rate hike, judged that the FOMC "could afford to be 

patient" in deciding whether to raise rates again, the minutes said. 

     These officials "saw little solid evidence" that the strength of 

the economy was showing through to significant wage or inflation 

pressures, the minutes said. 

--MNI Washington Bureau; tel: +1 202-371-2121; email: jean.yung@marketnews.com 

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