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The Fed on Tax Reform, Inflation

FedThe Federal Reserve released the minutes for the Fed’s December 2017 Federal Open Market Committee meeting on Wednesday afternoon, providing insights into the recent decision to increase interest rates, as well as other key economic concerns. That meeting saw the Fed agree to increase its benchmark interest rate from 1.25 percent to 1.5 percent.

The minutes reveal that the Fed officials expect the recent tax cuts passed by Congress and signed into law by President Trump to boost both consumer and business spending, although there were no firm predictions as to exactly how much of an impact they will have. The minutes do cite the tax changes as one reason the Committee boosted their forecast for 2018 GDP growth from 2.1 percent to 2.5 percent.

According to the minutes, “Most participants indicated that prospective changes in federal tax policy were a factor that led them to boost their projections of real GDP growth over the next couple of years.” The minutes also explained that “broad equity price indexes rose over the intermeeting period, likely reflecting in part investors' perceptions of increased odds for the passage of federal tax legislation and an associated potential boost to corporate earnings.”

Even though the actual passage of the tax bill hadn’t happened at the time of the FOMC meeting, the Committee members were still generally positive about economic conditions as 2017 neared a close. The minutes stated that “real economic activity appeared to be growing at a solid pace, buttressed by gains in consumer and business spending, supportive financial conditions, and an improving global economy."

There were some concerns and disagreement during the meeting, however. Inflation has been an ongoing concern for the Fed, specifically the failure to hit the organization’s target rate of 2 percent. Committee members Charles Evans and Neel Kashkari both voted against the interest rate hikes, citing inflation concerns as a factor. However, the minutes said that most Committee members "judged that much of the softness in core inflation this year reflected transitory factors and that inflation would begin to rise as the influence of these factors waned.” The minutes do, however, record some concerns that “inflation might stay below the objective for longer than [Committee members] currently expected."

The minutes added that “in light of elevated asset valuations and low financial market volatility, a couple of participants expressed concern that the persistence of highly accommodative financial conditions could, over time, pose risks to financial stability."

The next Federal Open Market Committee meeting is scheduled for January 30-31, 2018. You can read the full text of the Federal Open Market Committee minutes by clicking here.

About Author: David Wharton

David Wharton, Editor-in-Chief at the Five Star Institute, is a graduate of the University of Texas at Arlington, where he received his B.A. in English and minored in Journalism. Wharton has nearly 20 years' experience in journalism and previously worked at Thomson Reuters, a multinational mass media and information firm, as Associate Content Editor, focusing on producing media content related to tax and accounting principles and government rules and regulations for accounting professionals. Wharton has an extensive and diversified portfolio of freelance material, with published contributions in both online and print media publications. He can be reached at [email protected]

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