Fed expects rate hikes, minutes from January meeting show

The Federal Reserve's rate-setting committee showed more confidence in the need to keep raising interest rates at its last policy meeting, with most believing that inflation would perk up.

Though the policymaking Federal Open Market Committee chose not to hike its target rate at the January 30-31 gathering, members indicated clearly that the path ahead for rates was higher. Fed officials said the better-than-anticipated growth in fourth quarter of 2017, consistent job gains and stimulus from the GOP tax bill factored into their decisions.

Some members upgraded their expectations of economic growth for the near term compared to expectations at the December meeting.

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

The Fed's preferred measure of inflation has been below its 2 percent target rate for almost six years but the Labor Department reported earlier this month that underlying consumer prices posted their biggest gain in more than a year in January. Bond yields spiked after the Fed minutes were released as traders braced for the Fed to follow through on rate hikes.

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Most Fed officials predict that stronger growth will ultimately translate into stronger inflation, but they have made the same predictions repeatedly in recent years, without notable success. And in another sign of inflation, the consumer-price index for January increased by more than expected.

Markets already were on edge after the January Fed meeting, during which the committee said it expected that "further gradual adjustments" in monetary policy would be necessary particularly given the progress of inflation towards the 2 percent goal.

Some committee members aired concerns over the potential risks of an overinflated stock market and unsustainably low employment, while other were less convinced by the new data indicating a stronger economy. "They judged that a gradual approach to raising the target range would sustain the economic expansion and balance the risks to the outlook for inflation and unemployment".

The Fed's median projection for short-term rate increases in 2018 appears unlikely to change at that meeting, as it would likely require at least four out of five officials who have been projecting three rate increases to raise their estimates. The sell-off was partly triggered by a report that showed faster-than-expected wage growth. The minutes read, in part, "With regard to how firms might use part of their tax savings to boost compensation, a few participants suggested that such a boost could be in the form of one-time bonuses or variable pay rather than a permanent increase in wage structures". "These participants saw little solid evidence that the strength of economic activity and the labor market was showing through to significant wage or inflation pressures". "The discussion about inflation eventually recovering to 2 percent.pointed to more optimism regarding the outlook", said Aaron Kohli, rates strategist at BMO Capital Markets. Stocks did not start tailing off until after the meeting, particularly when the Labor Department reported on February 2 the boost in hourly earnings.

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