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--'Almost All' FOMC Members Deemed Dec Rate Hike Appropriate
--Tax Cuts Expected to Give Modest Boost to Business Spending
--Flatness of Yield Curve 'Not Unusual' By Historical Standards
By Jean Yung
WASHINGTON (MNI) - U.S. tax reform strengthened Federal Reserve
officials' outlook for economic growth and the labor market as they
expected tax cuts to give some boost to consumer and business spending,
minutes of the Federal Open Market Committee's December meeting showed
All but a couple of FOMC members thought it appropriate to raise
interest rates to a 1.25% to 1.50% range on Dec. 13, underscoring strong
support for the move among both voters and nonvoters. Two dissenters,
Charles Evans and Neel Kashkari, respectively of the Chicago Fed and
Minneapolis Fed banks, cited below-target inflation as reason to wait.
"Most participants reiterated their support for continuing a
gradual approach to raising the target range," the minutes said, "noting
that this approach helped to balance risks to the outlook for economic
activity and inflation."
Among the upside risks, inflation pressures could "build unduly"
if output expanded "well beyond its maximum sustainable level, perhaps
owing to fiscal stimulus or accommodative financial market conditions,"
the minutes said. However, on the other hand, a failure of inflation to
move toward the Fed's 2% target could lead to a slower pace of rate
hikes than projected, the committee said.
For now, the FOMC said it generally viewed the medium term outlook
for inflation as "little changed." It expects to raise rates three times
in 2018 and two times each in 2019 and 2020.
--TAX CUT BOOST
Many officials expected cuts in business taxes to provide a
"modest boost" to capital spending, "although the magnitude of the
effects was uncertain," the minutes said. That boost could generate
positive supply-side effects, raising potential output over the next few
However, officials noted that some responses from business contacts
suggested that firms were cautious about expanding capital spending in
response to the tax changes or noted that any increase in cash flow was
more likely to be used for mergers and acquisitions or to pay off debt
and buy back stock.
Meanwhile, lower individual tax rates should could draw more folks
to the job market as well as bolster consumer spending, which had
already been growing moderately on account of the strong labor market,
improving household net worth and buoyant consumer sentiment, Fed
officials said. But again, the extent of the potential effects were
uncertain, with a few officials noting expectations of tax reform may
have already raised consumer spending somewhat.
--INFLATION OUTLOOK UNCHANGED
Officials continued to expect inflation to return gradually to
their 2% target as transitory factors begin to fade out of calculations.
But several FOMC members noted that survey-based measures of inflation
expectations or market-based measures of inflation compensation remained
low or that other persistent factors may be holding down inflation,
"which would present challenges for the Committee in promoting a return
of inflation to 2 percent over the medium term."
Leaving the target range at 1% to 1.25% "for a time" would better
support an increase in inflation expectations and increase the
likelihood that inflation will rise to 2%, Evans noted in explaining his
--YIELD CURVE FLATTER
A flattening of the yield curve in November and December set
off a discussion among FOMC members, who agreed that the current degree
of flatness was "not unusual by historical standards."
Some officials expressed concern that a possible inversion of the
yield curve in the future could portent a recession or adversely affect
the health of banks and other financial institutions, however a couple
others argued an inversion might not necessarily foreshadow a downturn
as it is an expected consequence of the Fed's rate increases.
--MNI Washington Bureau; tel: +1 202-371-2121; email: email@example.com