MNI FOMC Min: Tax Cuts to Boost Spending; Magnitude Uncertain>

--'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 

Wednesday. 

     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 

years. 

     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 

dissenting vote. 

--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: jean.yung@marketnews.com 

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