Fed minutes reveal debate over inflation and Trump

While markets have been pricing-in two more interest rate hikes this year, a reduction of the Fed's bond holdings also would act as a tightening of monetary policy.

Minutes published last night from the March meeting of the federal open market committee, at which the Fed voted nine to one to raise interest rates, also showed that members had discussed whether to phase out or halt reinvestments all at once.

The Fed minutes of the March meeting showed policy makers wanted to move away, or slow, their post-crisis policy of reinvesting in Treasury bills and mortgage-backed securities, for which the Fed has built up a US$4.5 trillion balance sheet.

The central bankers now expected President Donald Trump's plans for expansionary fiscal policy would likely not begin until 2018.

With improving economic conditions, the Fed increased interest rates by 25 basis points on March 15. Unemployment is now below the Fed's 4.8 percent goal, while inflation has remained below the Fed's 2 percent inflation goal for several years.

On inflation, the minutes showed that some officials anxious that if unemployment, now at a low 4.7 percent, fell further, it could pose a "significant upside risk" of higher inflation.

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On Wednesday morning, before the release of the minutes, the futures market was forecasting a 4 percent probability of a rate hike in May and a 63 percent probability of a hike in June.

Trump has promised to return the U.S. to sustained 4% annual GDP growth (which he recently downgraded to a 3% target), slash taxes significantly, invest $1 trillion in infrastructure, expand job opportunities, and more. Congress and the White House had closer agreement on health-care policy than a tax overhaul, he said, according to Reuters.

Members, however, mostly agreed that any meaningful fiscal stimulus and its effect on the economy would not likely start until the beginning of next year.

On inflation, the minutes showed that some Fed officials anxious that if unemployment, now at a low of 4.7 percent, fell even further, it could pose a "significant upside risk" of higher inflation. " ... some participants and their business contacts saw downside risks to labor force and economic growth from possible changes to other government policies, such as those affecting immigration and trade".

"The desire to signal sooner than later is likely a function of the committee's wish to avoid adverse market reactions", the Barclays note said.

-"People interpret balance sheet run off to mean less hikes", said Priya Misra, head of global rate strategy at TD Securities. "That's another reason I think they would like to get this plan articulated, announced and on its way before Yellen leaves", he said.

  • Adam Floyd