Fiscal uncertainty hangs over how ‘soon’ Fed will raise rates

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Uncertainty over fiscal policy is clouding the outlook for monetary policy, which will see the US Federal Reserve raise interest rates “fairly soon”.

While Federal Open Market Committee members recognised the heightened uncertainty over the effects of changes to fiscal policy under the new government, the committee seemed relaxed over the near-term risks to the economic outlook.

The minutes from the last meeting released yesterday (22 February) state: “In discussing the outlook for monetary policy over the period ahead, many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon if incoming information on the labor [sic] market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee’s maximum-employment and inflation objectives increased.”

Yet Capital Economics chief US economist Paul Ashworth says while a March hike is still possible, he thinks June is more likely.

He says: “That language clearly leaves the door open to a March rate hike although, on balance, given chair Janet Yellen didn’t appear to be overly enthusiastic on a near-term hike in her more recent Congressional testimony, we still think the Fed will delay until June.”

He points out a disconnect between the outcome Fed officials seem to be hoping for and the decision likely taken by the voting members of the FOMC.

He adds: “The minutes once again illustrated that the uncertainty over fiscal policy is clouding the outlook for monetary policy. The Trump adminstration will probably have released a 2018 budget proposal by the time of the March FOMC meeting, but it will still take some time before it becomes clear whether those proposals have the support of Congress.”

Yellen told Congress and the House of Representatives last week that a gradual series of rate rises would likely take place throughout 2017 – a route to the US economy achieving and maintaining its employment and inflation objectives.

“As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession,” she said.