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Federal Reserve likely to raise interest rates 'soon': minutes

© AFP/File | "Most participants" at the meeting agreed that if the economy continued to perform as expected "it would likely soon be appropriate for the committee to take another step," the Federal Reseve minutes from a meeting May 23, 2018 said

WASHINGTON (AFP) - 

US central bankers are likely to raise the key interest rate "soon" given the strength of the economy and as inflation has inched higher, the Federal Reserve said Wednesday.

It seemed a clear signal of a rate hike coming next month, as financial markets expect.

However, the Fed will continue to move only gradually, even if inflation is "modestly" above its two percent target, as long as that increase is only "temporary," according to the minutes of the May 1-2 meeting of the policy-setting Federal Open Market Committee.

"Most participants" at the meeting agreed that if the economy continued to perform as expected "it would likely soon be appropriate for the committee to take another step," the minutes said.

The Fed last raised the benchmark federal funds rate in March, the sixth increase since December 2015, to a range of 1.5-1.75 percent.

It is expected to hike at least twice more this year but markets have been watching closely for signs the FOMC might be more aggressive in combatting inflation which has finally picked up to about two percent after languishing for months well below that level.

The minutes confirm the widespread interpretation of the May 2 statement that twice highlighted the fact the Fed's inflation target is "symmetric" -- meaning central bankers will not overreact to some increase in prices.

Officials noted that even with the recent uptick, it was "premature to conclude" that inflation would remain at the target level, given that prices have remained stubbornly subdued in recent years.

But some said inflation was likely to "modestly overshoot" the target level.

However, "it was also noted that a temporary period of inflation modestly above two percent would be consistent with the committee's symmetric inflation objective," the minutes said.

In fact, a period a bit above that level "could be helpful" in solidifying expectations that some price increases are on the way -- a process central bankers call "anchoring" inflation expectations.

That is important in monetary policy since expectations that prices will fall can sap economic activity.

But the minutes said there were "a range of views" among FOMC participants about how many more times the Fed would have to raise interest rates.

- 'Risks and uncertainties' -

While they generally expect "above-trend economic growth" the officials noted "a number of risks and uncertainties" about the outlook.

That includes labor shortages that could constrain some industries and pressure wages and prices higher, as well the President Donald Trump's trade policies.

While the minutes noted that the impact of trade policies would depend on US actions and the reaction of trading partners, "the uncertainty surrounding trade issues could damp business sentiment and spending."

The Fed has mentioned trade uncertainty several times in recent statements given the potential for undermining business investment, as Trump officials negotiate with China to head off a potential trade war.

Trump has imposed steep tariffs on steel and aluminum and the Fed noted rising costs for those and other inputs for US businesses, as well as the potential for higher Chinese tariffs on US agricultural goods, to "hurt US competitiveness."

In addition, rising oil prices, if they remain high, could fuel US price increases directly, the Fed said.

Wall Street, which had been wobbly for much the day, greeted the news warmly, with the tech-heavy Nasdaq and S&P 500 turning positive and the Dow Jones Industrial Average sharply paring earlier losses shortly after the minutes' release at 1800 GMT.

© 2018 AFP