Surging dollar seen as a risk factor
The potential for economy-boosting tax cuts under Donald Trump took centre stage in the Federal Reserve’s final policy meeting of 2016, with many rate-setters saying they could be forced to lift rates higher than expected if Congress takes action.
Almost all Fed officials meeting in December said the chances of growth surpassing their forecasts had grown because of the possibility of more “expansionary” fiscal policy under the president-elect and a Republican-controlled Congress.
However policymakers also stressed it was too soon to jump to firm conclusions about what fiscal policy would actually look like. “Participants agreed that it was too early to know what changes in these policies would be implemented and how such changes might affect the economic outlook,” the minutes to the meeting said.
The Fed on December 14 raised short-term rates for the second time in a decade and predicted a quicker speed of tightening this year compared with the one-a-year pace in 2015 and 2016. Speaking after the meeting, Fed chair Janet Yellen said the Fed was existing in a “cloud of uncertainty” as it weighs the possibility of tax and spending changes under the new administration.
Minutes of the meeting published yesterday revealed just how unclear the path of monetary policy now is given Fed officials do not know which of Mr Trump’s policies will pass after negotiations with Congress in the coming months. The possibility of a further increase in the dollar, which has surged since Mr Trump won election in November, re-emerged as a risk factor.
“Many participants emphasised that the greater uncertainty about these policies made it more challenging to communicate to the public about the likely path of the federal funds rate,” the minutes said. The staff at the Federal Reserve Board, whose forecasts informed the meeting, said they were already plugging in slightly higher economic growth forecasts because they expected tax and spending policy to boost growth more than in recent years.
Some attendees said business contacts were also beginning to factor in a more expansionary fiscal outlook, as some companies predicted they would benefit from possible changes in federal spending, tax and regulatory policies.
Other firms were less optimistic, however. And while financial markets have rallied because of expectations of fiscal stimulus, “many participants expressed the need for caution in evaluating the implications,” the minutes noted.
While there were “upside risks” from possible budgetary expansion, there were also risks of unexpected setbacks stemming from the possibility of additional dollar gains, financial vulnerabilities in foreign economies, and the fact that official interest rates remain relatively close to zero. Several participants in the meeting said stronger inflation and employment data had already convinced them to lift their forecasts.
Copyright The Financial Times Limited 2017
(c) 2017 The Financial Times Limited
