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US Fed officials say tax cuts could boost economy more than expected

© AFP/File / by Heather SCOTT | The Federal Reserve is now under the leadership of Jerome Powell, who was sworn in as chairman February 5, 2018


US central bankers said the recent tax cuts could juice the economy more than expected in the near term, meaning further interest rate hikes likely will be needed, according to meeting minutes released Wednesday.

But the minutes also revealed a split on the Federal Reserve's policy-setting committee, with some officials saying the central bank can afford to be patient in raising the benchmark lending rate, according to the minutes of the January 30-31 meeting.

The Fed did not increase the key interest rate at last month's meeting, and indicated three rate kes are expected this year. However, that was befor strong January employment report was released, spooking markets due to the fear the Fed will have to raise rates faster to head off inflation. Many economists now expect four moves in 2018.

Despite the expectations for an economic boost from the December tax cuts, the minutes stressed that the impact remains uncertain.

Participants in the policy-setting Federal Open Market Committee (FOMC) noted the tax cuts and the improved global economic outlook as factors supporting US growth this year, which they see as stronger than previously expected.

A number of members noted that "the effects of the recently enacted tax changes -- while still uncertain -- might be somewhat larger in the near term than previously thought," the minues said.

As a result, the "stronger outlook for economic growth raised the likelihood that further gradual upward policy firming would be appropriate."

- Patience? -

The use of the term "further" was the subject of intense debate among economists.

The minutes explain that the central bankers purposely used the term to "update" their description of the likely path of the rate used to set all kinds of lending from car loans to mortgages.

The first rate increase of the year is expected at the March FOMC meeting, which will be the first led by newly-installed Fed Chair Jerome Powell, and will be followed by his first press conference.

However, "some participants" cautioned the committee that inflation, stubbornly low last year despite solid economic growth and falling unemployment, could continue to fall short of the Fed's two percent goal.

They noted the absence of "significant wage or inflation pressures," and said the central bank "could afford to be patient in deciding whether to increase" the benchmark interest rate.

That would "allow participants to assess whether incoming information on inflation showed that it was solidly on track toward the committee's objective."

Several also noted the "considerable uncertainty" about the likely impact corporate tax cuts would have on investment, and predicted any wage increases likely would come in the form of one-time bonuses.

Businesses "may be only just beginning to determine how they might allocate their tax savings among investment, worker compensation, mergers and acquisitions, returns to shareholders, and other uses," they said.

In fact, a number of companies have announced plans to pay bonuses to employees, citing the windfall from the tax cuts, but few have announced wage increases.

But a number of Fed members noted that the continued strength in hiring "was likely to translate into faster wage increases at some point." And in fact the January job report included a 10-year record in wage gains after months of only tepid increases.

by Heather SCOTT

© 2018 AFP