Fed Shows Concerns Over Fiscal Policy Uncertainty

The Federal Reserve might need to raise rates faster than previously anticipated as the "undershooting” of the unemployment rate might help return inflation to the 2 percent target. Policymakers emphasized their uncertainty about the timing, size, and composition of any future fiscal and other economic policy initiatives, minutes from FOMC meeting held on December 13-14 showed. The Fed last hiked the target for the federal funds rate by 25 basis points to between 0.50 percent and 0.75 percent in December.
Federal Reserve | Joana Taborda | joana.taborda@tradingeconomics.com 1/4/2017 7:29:12 PM
Extracts From the Minutes of the Federal Open Market Committee:

In their discussion of their economic forecasts, participants emphasized their considerable uncertainty about the timing, size, and composition of any future fiscal and other economic policy initiatives as well as about how those polices might affect aggregate demand and supply. Several participants pointed out that, depending on the mix of tax, spending, regulatory, and other possible policy changes, economic growth might turn out to be faster or slower than they currently anticipated. However, almost all also indicated that the upside risks to their forecasts for economic growth had increased as a result of prospects for more expansionary fiscal policies in coming years. Many participants underscored the need to continue to weigh other risks and uncertainties attending the economic outlook. In that regard, several noted upside risks to U.S. economic activity from the potential for better-than-expected economic growth abroad or an acceleration of domestic business investment. Among the downside risks cited were the possibility of additional appreciation of the foreign exchange value of the dollar, financial vulnerabilities in some foreign economies, and the proximity of the federal funds rate to the effective lower bound. 

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 currently anticipated to limit the degree of undershooting and stem a potential buildup of inflationary pressures. However, with inflation still below the Committee's 2 percent objective, it was noted that downside risks to inflation remained and that a moderate undershooting of the longer-run normal unemployment rate could help return inflation to 2 percent. 

At this meeting, members continued to expect that, with gradual adjustments in the stance of monetary policy, inflation would rise to the Committee's 2 percent objective over the medium term as the transitory effects of past declines in energy prices and non-energy import prices dissipated and the labor market strengthened further. This view was reinforced by the rise in inflation in recent months and by recent increases in inflation compensation. Against this backdrop and in light of the current shortfall in inflation from 2 percent, members agreed that they would continue to closely monitor actual and expected progress toward the Committee's inflation goal.

After assessing the outlook for economic activity, the labor market, and inflation, members agreed to raise the target range for the federal funds rate to 1/2 to 3/4 percent. This increase in the target range was viewed as appropriate in light of the considerable progress that had been made toward the Committee's objective of maximum employment and, in view of the rise in inflation since earlier in the year, the Committee's confidence that inflation would rise to 2 percent in the medium term. Members judged that, even after this increase in the target range, the stance of monetary policy remained accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.

Fed Shows Concerns Over Fiscal Policy Uncertainty