U.S. Fed agrees on rates hikes, but frequency still up in air

Committee split on two, three or four moves

WASHINGTON • The U.S. Federal Reserve has entered 2018 without a clear plan for raising its benchmark interest rate and with the added uncertainty of an imminent change in its leadership.

An account of the Fed’s final meeting of 2017, which the central bank published this week, said officials generally agreed that the Fed should continue to raise its benchmark rate in the new year. But Fed officials expressed a range of views about the frequency of future hikes.

Six of the 16 officials on the Federal Open Market Committee predicted during the December meeting that the Fed would raise rates three times in 2018. But six officials predicted two hikes or fewer and four officials predicted the Fed would raise rates at least four times.

The decision about how often to raise rates will be made under new management. The Fed’s chairwoman, Janet Yellen, plans to leave the Fed in early February; her nominated successor, the Fed governor Jerome H. Powell, is awaiting a Senate confirmation vote.

Last year was the first since the 2008 financial crisis that the Fed articulated a clear plan for monetary policy and stuck with it. The central bank said it would raise rates three times and did exactly that, with the third hike coming in December.

The decision at that meeting to raise the benchmark rate into a range between 1.25 and 1.5 per cent reflected the Fed’s optimistic expectations for the economy, the account said.

“Participants saw the outlook for economic activity as having remained strong or having strengthened since their previous meeting, in part reflecting a modest boost from the expected passage of the tax legislation,” said the account, which was released after a standard three-week delay.

Officials saw few serious dangers on the horizon, the account said. Most expected inflation to rebound from a long period of sluggishness and were not overly concerned about rising asset values. The S&P 500 stock index has climbed 19 per cent over the last year.

The Fed also predicted there would be a modest economic boost from the tax cuts President Donald Trump signed into law at the end of the year. The account said that many officials predicted increases in both consumer and business spending, although they expressed uncertainty about the magnitude.

In the December round of economic projections, the median forecast of Fed officials was that the economy would grow 2.5 per cent in 2018, up from a median forecast of 2.1 per cent in September. The tax cut was the primary reason for the higher estimate, Yellen said at a news conference.

The estimate reflected the view of Fed officials that the benefits of the US$1.5-trillion tax cut will be attenuated by higher interest rates, as the federal government seeks to borrow more money. and said in a post-meeting statement that the Fed needed to demonstrate a commitment to its target.

“I am concerned that too many observers have the impression that our two-per-cent objective is a ceiling that we do not wish inflation to breach,” Evans said in the statement.

Most Fed officials, however, expressed confidence that continued growth would increase inflation. That group includes the plurality of officials favouring three rate hikes next year.

It also includes the minority of officials who are concerned that the Fed may not be raising rates fast enough. They noted that the economy is growing more quickly, money remains easy to borrow and the supply of workers is dwindling — factors that could fuel faster inflation.

One new item on the agenda at the December meeting: Concern about a technical indicator called the yield curve, which compares the interest rates on the different kinds of debt issued by the federal government, which borrows money for periods ranging from one month to 30 years.

In general, investors demand higher interest rates on longerterm loans, to compensate for greater uncertainty, but the difference between short-term rates and long-term rates on federal debt has been compressing. When short-term rates exceed long-term rates, the yield curve is said to be “inverted.” Historically, that has often happened before a recession.

Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, voted against the December rate hike. He said in a postmeeting statement that the flattening of the yield curve indicated the Fed was moving too quickly.

“In response to our rate hikes, the yield curve has flattened significantly, potentially signalling an increasing risk of a recession,” Kashkari said.

The minutes said most Fed officials did not share Kashkari’s concerns, judging instead “that the current degree of flatness of the yield curve was not unusual by historical standards,” and that further flattening “would not necessarily foreshadow or cause an economic downturn.”