Economist's Insights

Fed Minutes Show a Consensus for More Hikes, Continued Debate about Inflation

Jan 3, 2018

The December Minutes showed most participants and almost all voting members expected gradual rate increases to continue. But there continued to be debate about what the actual path should be and officials saw risks of both a slower and faster reality for the overnight rate. A few believed the projected path was too aggressive (could cause inflation to remain below target) while a few others believed it wasn’t aggressive enough (overall financial conditions remain easy, economy is at max employment). As to the upside and downside risks, a tax reform boost and/or too easy of financial conditions could cause the Fed to hike faster but if inflation doesn’t improve towards 2% it could slow them down. On the tax cuts, the Fed saw a potential boost to spending by consumers and businesses which drove the upgrade to the GDP forecast in the SEP. Still, there appeared to be little concern of inflation getting out of hand. Accommodative financial conditions were credited for the solid pace of economic activity but are a source of concern for others who believe it creates potential risks to financial stability. There was also discussion of whether the flattening yield curve is an ominous event. Bottom Line: The consensus in December was for additional gradual rate increases in 2018 and beyond and the recent tax reform poses upside risks to the Fed’s forecast. In addition, the Fed is watching below-target unemployment and overall financial conditions as they determine how much to move rates going forwards. But as expected before the Minutes, there remained an uncertainty around the inflation metrics which likely hold the key to the policy path for 2018.