Federal Reserve

Fed wrestles with inflation and impact of Trump’s stimulus plans on US economy

PUBLISHED : Thursday, 06 April, 2017, 2:55am
UPDATED : Thursday, 06 April, 2017, 2:55am

Federal Reserve officials last month struggled to come to grips with two big uncertainties facing the US economy — whether it would be safe to let inflation rise faster for a while and how to assess the impact of President Donald Trump’s ambitious economic stimulus plans.

Minutes of the Fed’s discussion at their March meeting released Wednesday showed near-unanimous support for the quarter-point increase in its key policy rate, the second rate hike in three months. But there was less agreement over the issues of inflation and Trump’s economic plans.

The group decided to keep signalling that future rate hikes would be gradual but be prepared to respond quickly to changes in the economic outlook. Many analysts believe the Fed will hold rates steady at the May meeting.

The minutes showed that several Fed officials believed that Trump’s stimulus plans would likely not begin until next year. The minutes said that because of the “substantial uncertainties” about the outlines of the programme that will eventually emerge from Congress, about half of the Fed officials had not included any assumptions about Trump’s efforts in their economic forecasts.

While most believed Trump’s plans had the potential to boost growth, some said there were also downside risks from a possible adverse economic reaction from Trump’s measures to limit immigration and to increase trade barriers to protect American workers.

On inflation, the minutes showed that some Fed officials worried that if unemployment, currently at a low of 4.7 per cent, fell even further, it could pose a “significant upside risk” of higher inflation. The Fed’s two goals are to achieve maximum employment and moderate inflation. Unemployment is currently below the Fed’s 4.8 per cent goal, while inflation has remained below the Fed’s 2 per cent inflation goal for several years.

While some Fed officials argued that the inflation target might be achieved by the end of this year, other Fed officials argued that since inflation had run below 2 per cent for so long, it would do no harm to allow prices to rise above 2 per cent for a time.

“A few members expressed the view that the committee should avoid policy actions or communications that might be interpreted as suggesting the committee’s 2 per cent inflation objective was actually a ceiling,” the minutes said.

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The Fed’s decision to boost its key policy rate by a quarter-point left it in a range of 0.75 per cent to 1 per cent.

The Fed continued to signal that it expected to boost rates three times this year, and many private economists believe that the upcoming rate hikes might occur at the June and September meetings. The next Fed meeting is May 2-3.

The minutes were released with the customary three week time delay after the March meeting.

Separately, most Federal Reserve officials said they backed a policy change that would begin shrinking the central bank’s US$4.5 trillion balance sheet later this year, as they reiterated their outlook for gradual interest-rate increases.

“Most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the committee’s reinvestment policy would likely be appropriate later this year,” according to minutes of the Federal Open Market Committee’s March 14-15 meeting released Wednesday in Washington.

“Many participants emphasised that reducing the size of the balance sheet should be conducted in a passive and predictable manner,” the minutes showed.