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SONIA Dove Strikes Again

--Several Voters 'Reasonably Confident' Near-Term Rate Hike Appropriate
--Many Officials Saw Some Likelihood of Infl Below Target for Longer
--GOP Tax Cuts Could Spur Business Fixed Investments
By Jean Yung
     WASHINGTON (MNI) - With the economic outlook little changed in the 
run-up to its Nov. 1 gathering, many Federal Reserve officials deemed 
another imminent increase in their benchmark short-term interest rate to 
be appropriate even as worries over a longer lasting shortfall in 
inflation deepened, minutes of the meeting showed Wednesday. 
     That should support overwhelming market expectations that the Fed 
will raise its key policy rate to a target range of 1.25% to 1.50% at 
the conclusion of its next meeting on Dec. 13. 
     Several voting members "were reasonably confident that the economy 
and inflation would evolve in coming months such that an additional 
firming would likely be appropriate in the near term," the minutes said. 
     Among all of the Federal Open Market Committee, "many participants 
thought that another increase in the target range for the federal funds 
rate was likely to be warranted in the near term if incoming information 
left the medium-term outlook broadly unchanged." 
     Still, policymakers appeared to be increasingly uncertain why 
inflation has not perked up even as the labor market tightened and the 
unemployment rate dropped to 4.1%. The Fed's preferred measure of 
inflation, the core personal consumption expenditures price index, fell 
sharply from a 1.9% annual pace earlier this year to just 1.3% in 
September. 
     "With core inflation readings continuing to surprise on the 
downside, however, many participants observed that there was some 
likelihood that inflation might remain below 2 percent for longer than 
they currently expected," the minutes said. 
     One possibility for the low readings was cited as "the influence of 
developments that could prove more persistent," including a decline in 
longer term inflation expectations or secular factors such as 
technological innovation disrupting existing business models. But those 
theories proved controversial among the FOMC members. 
     While several participants, which include nonvoters, expressed 
concern that weak inflation could lead to a decline in longer term 
inflation expectations "or may have done so already," others noted the 
measure had remained stable this year. 
     The Fed kept its policy rate steady at a target range of 1.00% to 
1.25% at the November meeting as expected. The minutes showed that all 
officials thought it was appropriate to hold rates steady and "nearly 
all" supported saying in their post-meeting statement that "a gradual 
approach to increasing the federal funds rate will likely be warranted."  
     Officials cited the tight labor market as supporting inflation over 
the medium term. Payroll growth remained "well above the pace likely to 
be sustainable in the longer run" and was likely to ripple across wages. 
A few officials said they saw recent data as indicating some firming in 
wage growth while a few others saw wages as little changed over the past 
year. 
     Judging the economy more broadly, Fed officials again noted that 
the expansion was evolving mostly as expected and even the unusually 
destructive hurricane season won't have any material impact over the 
medium term. 
     Officials "anticipated appreciable increases in business fixed 
investment" on account of improved demand from abroad, rising profits 
and the substitution of capital for labor as competition for the latter 
heats up. 
     A few officials noted the prospects for significant tax cuts 
under the Republican proposal "had risen recently," saying "the 
expansion in business fixed investment could be given additional impetus 
if legislation involving tax reductions was enacted." 
     Financial conditions remained accommodative, causing several 
officials to express concerns about a potential buildup of imbalances. 
However, a low neutral rate of interest partly explained the elevated 
asset prices, and strengthened regulation has increased the resilience 
of the financial system to any sharp reversal in asset prices, the 
minutes noted. 
--MNI Washington Bureau; tel: +1 202-371-2121; email: jean.yung@marketnews.com 
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