FOMC Minutes Show Split on Inflation Outlook as Fiscal Policy Risk Increases
- FOMC members voted unanimously to raise rates in December by 0.25 to 0.50-0.75%
- Fiscal stimulus seen as upside risk as Fed revised GDP outlook higher
- An initial slump for the Dollar on inflation forecasts recovers for gains
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The Federal Reserve released minutes from its December 13th-14th, 2016 meeting, during which the FOMC voted to raise rates for the first time since the December 2015 liftoff. Some of the key issues discussed at the meeting included the staff’s inflation and GDP outlook for the coming years, prospective fiscal policy and risks to their forecasts.
Fiscal policy was a notable talking point as the FOMC meeting followed the US Presidential election, with both candidates promising increased government spending.
The impact of fiscal stimulus on inflation was discussed in the FOMC minutes, and was also reflected in the staff’s upward revision of GDP growth over the next several years. The minutes also noted that members agreed there was “heightened uncertainty about possible changes in fiscal and other economic policies”.'
Downward risks to inflation included the strengthening US Dollar, which may appreciate faster than expected. However, members noted that this scenario will likely be subdued as inflation expectations were revised higher and the economy is expected operate above its long-run potential.
In terms of forward guidance on the rate path, the minutes noted that members saw modest risk of undershooting inflation as the data shows that both inflation and wages continue to grow below the committee’s targets. With regards to the data, members felt there was time to respond with changes to monetary policy if necessary.
The US Dollar spiked lower in the minutes following the release from the FOMC, before recovering from its losses and moving to further gains. Bond yields fell in the 15 minutes after the release before promptly returning all its gains within the hour. US equities rose in the minutes following the release.
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