The minutes of the Dec 12-13 policy meeting also showed
officials believe the likely benefits of the recently adopted tax cut are
highly uncertain.
WASHINGTON: US central bankers are divided over how fast
they will need to raise interest rates next year, given differences over the
causes behind the low inflation and wage gains seen to date, a report showed on
Wednesday (Jan 3).
The minutes of the Dec 12-13 policy meeting, when the
Federal Reserve raised the benchmark lending rate for the third time last year,
also showed officials believe the likely benefits of the recently adopted tax
cut are highly uncertain.
While the tax cuts could boost spending, there are indications
companies are likely to use the windfall for mergers and share buybacks, the
minutes said. That is contrary to the arguments its supporters used to back the
massive tax package.
The Fed's policy-setting Federal Open Market Committee last
month increased the key lending rate to 1.25-1.5 per cent, an increase of a
quarter-point on the rate that affects all types of credit from mortgages to
car loans.
The Fed's quarterly economic projections also released last month
indicated the central bank is likely to raise the federal funds rate three
times in 2018 and once in 2019.
However, that is a median forecast and the minutes shed light on
the conflicting views among the policymakers, which centers on whether
inflation has remained stubbornly below the Fed's two per cent target due to
temporary or more enduring factors.
HOW MANY RATE HIKES?
A few FOMC members said three rate increases, while still
gradual, would be too fast and "might prove inconsistent with a sustained
return of inflation to two per cent."
However, a few others found the pace of rate hikes should be
"somewhat faster" than the three signaled in the forecast. They
worried that "continued low interest rates risked financial instability in
the future, or that the labor market was increasingly tight."
With steady job creation in the past two years pushing the
unemployment down to a 17-year low of 4.1 per cent, Fed officials have been
perplexed by the low inflation and sluggish wage gains seen so far, but largely
attributed them to transitory factors.
The Fed's preferred inflation measure, the Personal Consumption
Expenditures price index, remains well below two per cent and shows few signs
it will rise soon. The 12-month core PCE, which excludes volatile food and
energy prices, has risen just 1.4 per cent.
Two voting members of the FOMC, Charles Evans of Chicago and
Neel Kashkari of Minneapolis, dissented from the decision to raise rates last
month saying the central bank should wait to see actual wage and inflation
increases before raising rates.
Analysts at Barclays said the actual pace of rate increases will
depend on inflation this year, but if it does not rise by March "or if the
unemployment rate decline stalls out, then the case for a pause in the rate
hike cycle strengthens."
UNCERTAIN TAX CUT IMPACT
Last month's policy meeting took place just before the US
Congress approved the massive US$1.4 trillion tax package, and many Fed
officials noted the potential for the tax cuts to provide some boost to
consumer and business spending. However, they highlighted the uncertainty about
the magnitude of the impact.
On the business side especially, reports from firms and surveys indicate,
"the increase in cash flow that would result from corporate tax cuts was
more likely to be used for mergers and acquisitions or for debt reduction and
stock buybacks."
Republicans in Congress have said the package - which
lowers the corporate tax rate to 21 per cent from 35 per cent - would
boost business investment and hiring, while also helping American families.
The Fed forecasts showed central bankers now are looking for
faster growth of 2.5 per cent next year, compared to the previous forecast of
2.1 per cent.
Source: AFP/d
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