MNI FOMC Minutes: Dec Hike Likely; Inflation Worries Deepen>

--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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