Low unemployment, stimulus could speed rate hikes
Fed minutes forecast three rate increases instead of two in 2017
Federal Reserve WASHINGTON policymakers said last month they might have to raise interest rates faster than anticipated to prevent rapidly falling unemploy- ment from fueling excessive inflation, according to minutes of the Fed’s Dec. 13-14 meeting.
Fed officials also said it was too early to judge the effects of President-elect Donald Trump’s proposed fiscal stimulus, but that it carried “upside risks” for stronger economic growth and inflation.
Their remarks at the meeting help explain why the Fed, in addition to raising its benchmark interest rate for the first time in a year as anticipated, ratcheted up its forecast to three rate hikes in 2017 from a projected two moves in their previous estimate.
That surprised investors and helped temper a market rally.
“Many participants judged that the risk of a sizable undershooting of the longer-run normal unemployment rate had increased somewhat and that the Committee might need to raise the federal funds rate more quickly than anticipated to limit the degree of undershooting and stem a potential buildup of inflationary pressures,” the minutes said.
The 4.6% jobless rate is already at the long-run rate the Fed had projected.
That’s expected to force employers to bid up wages to attract a smaller pool of available workers, potentially spurring inflation that eventually exceeds the Fed’s annual 2% target.
Annual wage gains have picked up recently but, at 2.5%, remain measured.
Still, “a couple” of Fed officials voiced concerns that the Fed’s vow to boost rates gradually “might be misunderstood as “a commitment to only one or two rate hikes per year.”