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Fed Sees Faster Economic Growth Under Trump, but Not a Boom Fed Officials See Faster Economic Growth Under Trump, but No Boom
(about 9 hours later)
WASHINGTON — Federal Reserve officials expect Donald J. Trump’s election to result in somewhat faster economic growth over the next several years, but they see little chance of the boom Mr. Trump has promised, according to an account of the Fed’s most recent meeting in mid-December.WASHINGTON — Federal Reserve officials expect Donald J. Trump’s election to result in somewhat faster economic growth over the next several years, but they see little chance of the boom Mr. Trump has promised, according to an account of the Fed’s most recent meeting in mid-December.
That is in part because the Fed plans to raise interest rates more quickly if growth accelerates.That is in part because the Fed plans to raise interest rates more quickly if growth accelerates.
The minutes, released Wednesday, offer more evidence that the Fed sees itself as a counterweight to Mr. Trump’s promised policies of tax cuts and infrastructure and defense spending. They also show just how much Mr. Trump’s unexpected victory has clouded the economic outlook for 2017. For now, however, Fed officials plan to wait and see what happens next, the account said.
The Fed raised its benchmark rate for just the second time since 2008 at the December meeting, citing the continued expansion of the economy and the steady decline of unemployment. The Fed debated and delayed that increase for most of last year, but the account published Wednesday after a standard three-week delay described the final decision as uncontroversial. “While the Fed signaled that it would likely respond to expansionary fiscal policies with a faster pace of rate hikes, the Fed believes it is too early to embed this into its baseline,” Michael Gapen, chief United States economist at Barclays, wrote on Wednesday following the release of the minutes. “Any real shift in the stance of monetary policy will require more clarity on the stance of fiscal policy.”
Officials instead spent the meeting talking about what came next. The officials, led by Janet L. Yellen, the Fed’s chairwoman, expect to raise rates three times next year. But the account contains several affirmations that Fed officials are ready to raise rates more quickly if necessary. At the December meeting, the Fed raised its benchmark rate for just the second time since 2008, citing the continued expansion of the economy and the steady decline of unemployment. The Fed debated and delayed that increase for most of last year, but the account published on Wednesday — after a standard three-week delay — described the final decision as uncontroversial.
Citing “uncertainty regarding fiscal and other economic policies,” the minutes said many Fed officials “emphasized that the greater uncertainty about these policies made it more challenging to communicate to the public about the likely path of the federal funds rate.” In particular, the minutes said that officials wanted the public to understand that the Fed’s prediction about the pace of rate increases depended on its prediction about economic growth. Faster growth would mean faster increases. Officials instead spent the meeting talking about what comes next. Mr. Trump has promised a bevy of major changes in economic policy, including tax cuts and spending increases, reductions in regulation, and restrictions on trade and immigration. As a result, the account said, Fed officials regard both faster growth and slower growth as more likely than before the election, when the economy seemed locked into its longstanding pattern of slow and steady growth.
By holding rates at low levels, the Fed has sought to increase economic growth by encouraging borrowing and risk-taking; higher rates reduce the stimulative effect. The benchmark rate now sits in a range from 0.5 percent to 0.75 percent, still a very low level by historical standards. “The job of conducting U.S. monetary policy has not become any easier over recent months,” said James Marple, senior economist at TD Bank, referring to the increased uncertainty.
The economic forecast prepared by the Fed’s staff anticipates that Mr. Trump’s election will result in “slightly higher” growth over the next several years. Mr. Trump, in concert with congressional Republicans, is expected to cut taxes and perhaps to increase federal spending in some areas. But the Fed predicts the benefits will be “substantially counterbalanced” by higher interest rates and a stronger dollar, which will reduce exports of American goods and services. The Fed, led by Janet L. Yellen, the chairwoman, predicted in December that it would raise rates three times this year. The account said officials were not yet ready to predict how the pace of rate increases might change as a result of new policies pursued by Mr. Trump and Congress.
Most Fed officials, in their own forecasts, also saw an increased chance of faster growth. But they said Mr. Trump’s election had clouded the outlook. “Participants emphasized their uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate demand and supply,” the minutes said. The Fed’s policy-making committee, the Federal Open Market Committee, has 17 members, 10 of whom cast votes on monetary policy.
“Participants emphasized their uncertainty about the timing, size and composition of any future fiscal and other economic policy initiatives as well as about how those policies might affect aggregate demand and supply,” the minutes said. The Fed’s caution amounts to a bias in favor of growth. The economy is expanding at roughly the pace Fed officials regard as sustainable. The work force is growing slowly as more baby boomers retire, and productivity is rising slowly. Two percent growth may be about as good as it gets.
Ms. Yellen has warned that fiscal stimulus, like a tax cut or a spending increase, could increase economic growth to an unsustainable pace in the near term, resulting in increased inflation. The Fed quite likely would seek to offset such policies by raising interest rates more quickly.
Instead of acting pre-emptively, the Fed is choosing to wait for more information.
But the minutes said officials were concerned about the challenge of communicating their increased uncertainty. They want to be clear that the Fed’s prediction about the pace of rate increases depends on its prediction about economic growth. Faster growth will mean faster increases.
The account said Fed officials were confident in their ability to raise rates quickly enough to prevent overheating, seeing “only a modest risk” of a “sharp acceleration in prices.”
By holding rates at low levels, the Fed has sought to increase economic growth by encouraging borrowing and risk-taking; higher rates reduce the stimulative effect. The benchmark rate now sits in a range from 0.5 percent to 0.75 percent, still very low by historical standards.
“Consumers have no reason to panic about the rate hike last month, or even about additional rate increases in 2017,” said Alan MacEachin, chief corporate economist at Navy Federal Credit Union. He noted that the last rate hike would add $1 to the monthly payment on a $5,000 credit card balance.
The economic forecast prepared by the Fed’s staff for the December meeting anticipated that Mr. Trump’s election would result in “slightly higher” growth over the next several years. It said a likely increase in fiscal stimulus would be “substantially counterbalanced” by higher interest rates and a stronger dollar, which would reduce exports of American goods and services.
Several Fed officials reported that Mr. Trump’s election had increased optimism among business executives in their districts. “Some contacts thought that their businesses could benefit from possible changes in federal spending, tax and regulatory policies,” the minutes said.Several Fed officials reported that Mr. Trump’s election had increased optimism among business executives in their districts. “Some contacts thought that their businesses could benefit from possible changes in federal spending, tax and regulatory policies,” the minutes said.
The Fed noted, however, that some executives also were concerned about the negative impact of other proposed policy changes. In a recent interview, John Williams, president of the Federal Reserve Bank of San Francisco, said that many executives in his district, which encompasses the western United States, worried about the potential impact of restrictions on immigration and on foreign trade. The minutes also noted, however, that some executives were concerned about the negative impact of proposed policy changes. In a recent interview, John Williams, president of the Federal Reserve Bank of San Francisco, said many executives in his district, which encompasses the western United States, worried about the potential impact of restrictions on immigration and on foreign trade, both of which have been important drivers of regional growth.
Businesses across the country also reported increased difficulty in hiring qualified workers, the minutes said. The unemployment rate fell to just 4.6 percent in November. Businesses across the country also reported increased difficulty in hiring qualified workers, the minutes said. The unemployment rate fell to just 4.6 percent in November. The lack of readily available workers could further limit the benefits of a fiscal stimulus.
Mr. Trump and congressional Republicans want to pass a package of tax cuts this year, and they could take other steps to stimulate economic growth. It could take some time, however, for those measures to increase the pace of economic growth. And independent economists, like most Fed officials, are not convinced that such measures would result in significantly faster growth.
Current economic growth is at roughly the pace that most Fed officials regard as sustainable. The work force is growing slowly as baby boomers retire, and productivity also has increased slowly in recent years. The result is that 2 percent growth may be about as good as it gets for the United States.
Fiscal stimulus might produce a burst of faster growth, but Fed officials are concerned that it also would drive higher inflation. To prevent that, the Fed could move to raise rates more quickly than it currently projects. The account added that Fed officials were confident in their ability to prevent overheating, seeing “only a modest risk” of a “sharp acceleration in prices.”