Stronger economy boosts chance for rate hikes

Federal Reserve officials at their January meeting saw a brightening global economic picture and the effects of recently passed tax cuts raising the prospect for solid growth and continued interest rate increases.

The minutes of the Fed’s Jan. 30-31 discussions showed that the officials were more optimistic about the economy than they had been in December. They noted a stronger US and global economy as well as expectations that the Republican tax cuts enacted in December would boost growth.

The minutes released Wednesday said “a majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate.”

The Fed held rates steady at the January meeting, which was the last to be led by Janet Yellen before her term as chair ended this month and she was succeeded by Jerome Powell. Last month’s meeting preceded the stock market plunge in early February and the budget deal in Congress that will boost spending on military and domestic programs by an additional $300 billion over two years.

Some economists have suggested that the market turbulence and the prospect of higher federal debt — and higher bond yields — might make the Fed more cautious about raising short-term rates.

But others say they think the central bank will discount those developments and focus instead on the stimulative effects of the Republicans’ $1.5 trillion tax cut and the additional spending from the budget deal. The possibility of higher inflation resulting from the tax cuts and spending increases could even make the Fed likelier to tighten credit.

Paul Ashworth, chief US economist at Capital Economics, said he is forecasting four Fed rate hikes this year on the basis of his expectations that inflation will finally rebound this year and the decisions by Congress to cut taxes and boost spending will increase economic growth.

“The minutes... show that officials were firmly on track to raise interest rates again in March, even before the latest incoming data showing stronger wage growth and core inflation,” Ashworth said.

The Fed raised rates three times in 2017 and signaled at its December meeting that it expected to do so three more times in 2018. But many analysts now think the Fed may accelerate its rate increases and boost rates four times this year. That would likely cause consumer rates such as mortgage rates to rise more quickly.

The Fed’s benchmark rate remains at a still-low 1.25 to 1.5 percent. /