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Uncertainty Clouds Fed’s Economic Outlook

FedMembers of the Federal Open Market Committee (FOMC), the policymaking arm of the Federal Reserve, were in agreement at their December meeting that it was time to raise the funds target rate by 25 basis points for the first time in a year, according to the FOMC minutes [1] for the December meeting released Wednesday.

According to the minutes, the FOMC participants expect the economy to continue to expand at a moderate pace and for the labor market to strengthen further; about half of the participants assembled their economic forecasts for 2017 assuming a more expansionary fiscal policy. In fact, the Fed has forecasted three more rate hikes of 25 basis points each in 2017 based on expectations of a more expansionary fiscal policy. Uncertainty lingers among the FOMC participants, however, the minutes stated.

“Where the committee was previously divided on the appropriate timing of the next rate hike during prior meetings, the primary source of dispute—or at least uncertainty—during the December meeting was the prospect for fiscal policy under a Trump presidency,” said Curt Long, Chief Economist with the National Association of Federal Credit Unions [2]. “A portion of the committee was convinced that fiscal stimulus is coming in 2017 and baked that into their forecasts. But the overall tone was one of caution, as the committee will wait and see how legislation unfolds.”

The Fed stated in the minutes, “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.”

December’s rate hike was the first in a year and only the second since 2006. While the Fed has forecasted three rate hikes in 2017, it originally forecasted four for 2016 but fell three short of that prediction.

“As for the decision to raise rates in December, the committee was apparently of one accord,” Long stated. “As inflation begins to strengthen, though, it was notable that the committee stressed the need to respond with ‘timely adjustments to monetary policy’ and even suggested that the Fed could begin to draw down the size of its balance sheet if inflationary pressures build too quickly.”

Click here [1] to read the entire Fed minutes from the December 13-14 FOMC meeting. The next FOMC meeting, and the first one of 2017, will be January 31-February 1.