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January 3rd, 2018
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Fed Divided Over Rate Hikes

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Fed Divided Over Rate Hikes
MarketWatch

The Federal Reserve in December forecast three rate hikes in 2018 but minutes of the central bank meeting released Wednesday show a distinct lack of unity with the projection.

The minutes portray two camps, of roughly the same size, who are both uncomfortable with the forecast for completely different reasons.

One camp of a “few” officials, on the dovish side, thought that three rate hikes this year might be too aggressive.

These officials argued that three rate hikes might prevent a “sustained” return to the Fed’s 2% inflation. They said they didn’t think interest rates had much further to rise before reaching the level of rates that would no longer be “accommodative” or boosting growth.

The other, more hawkish, camp of a “few” officials thought the forecast of three rate hikes was too slow.

These officials noted that financial conditions had not tightened since the Fed started raising rates at the end of 2015 and that continued low rates risked financial instability.

Ironically, at the same time Fed officials appear not to like their own forecast, the market has come around to basically accepting it.

Investors have penciled in a 70% chance of a rate hike at the central bank’s March meeting and have now priced in slightly more than another move by December.

Minutes from meeting showed that Fed officials expect only a modest impact on the economy from the Republican tax plan.

The Fed staff said it pushed up its forecast for GDP growth modestly because the final tax plan was larger than assumed.

Fed officials said there would be a modest boost to capital spending but the benefits to the economy were uncertain.

While this had the chance of having some “positive supply-side effects” including the expansion of the economy’s growth potential over the next few years, the central bank’s business contacts seemed cautious and suggested the increase in cash flow might be used for mergers, debt reduction and stock buybacks that don’t have wide economic benefits.

At the December meeting, by a seven-to-two vote, the Fed increased its benchmark federal-funds rate by a quarter percentage point to a range between 1.25% and 1.5%, the third increase of the year. That move was widely expected.

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