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All signs point to more Fed rate hikes in 2018

Federal Reserve officials are increasingly optimistic about U.S. economic growth this year, leaving them on course to...

Posted: Feb 22, 2018 9:55 AM
Updated: Feb 22, 2018 9:55 AM

Federal Reserve officials are increasingly optimistic about U.S. economic growth this year, leaving them on course to lift interest rates further.

The minutes of the Fed's late January meeting, made public Wednesday, showed an even rosier view of the economy than officials held at the end of last year. Some members upgraded their forecasts.

The economy is building steam after years of anemic growth. It's grown at a strong pace in the last three quarters. Consumer confidence has returned to pre-crisis levels. And businesses are investing at the fastest rate since 2011.

At its latest meeting, Fed officials took into account the $1.5 trillion tax cut passed by Congress in December and record highs in the stock market in January. The two-week market sell-off that rattled investors came later.

Fed officials noted the economic impact of the new tax law "might be somewhat larger in the near term than previously thought," according to the minutes.

Since that meeting, even more evidence has shown a strengthening economy, most notably the fastest wage growth in nine years.

Investors will be closely watching Fed Chairman Jerome Powell's first appearance on Capitol Hill next week, and then the Fed's March meeting, for clues about whether even faster interest-rate hikes are in the works.

For now, the central bank has penciled in three rate hikes this year, and two more in 2019. The minutes of the January meeting didn't indicate plans for additional moves, and analysts who read the minutes suggested the Fed would stay the course.

"The Fed is sticking to their path of three hikes, and the balance sheet will continue to get smaller," said Peter Boockvar, chief investment office at Bleakley Advisory Group, in a note.

The Fed has also been unloading trillions of dollars of assets that it purchased to lift the economy after the financial crisis a decade ago.

Stocks gained ground after the minutes were released, then reversed course. The Dow finished down 167 points.

And the 10-year Treasury yield crept to a four-year high of 2.95%. Bond yields have been rising as investors grapple with the possibility that the stronger economy, a growing federal deficit and accelerating inflation will force faster interest rate hikes.

Related: Fed's Powell will head to Capitol Hill later this month

While policymakers accounted for the impact of tax cuts in their economic forecasts in December, several officials said they upwardly revised their growth projections in January, according to the minutes.

In their January discussion, Fed officials pointed to a stronger labor market, a steady employment rate of 4.1%, a rise in household spending and solid investment by businesses as factors in bolstering their confidence to move forward with at least three rate hikes this year.

"A majority noted that a stronger economic outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate," according to the minutes.

Nearly all FOMC members said they expect inflation to gradually move to the Fed's 2% target, the level it considers healthy for the economy. Fed staff projected they expect to meet that goal by 2020.

Still, Fed officials noted "considerable uncertainty" remained around a number of federal government policies that could affect the economy.

Related: Yellen's historic legacy: Wise caution and a successful recovery

While FOMC participants said businesses they spoke to were "generally upbeat" about the economy because of tax cuts and an improving global economy, some Fed officials conveyed "considerable uncertainty" over how corporate tax cuts would spur business investment.

"Firms may be only just beginning to determine how they might allocate their tax savings among investment, worker compensation, mergers and acquisitions, returns to shareholders, or other uses," according to the minutes.

Participants said some businesses indicated they might use part of their tax savings as a one-time bonus for workers as opposed to a permanent wage increase, according to the minutes.

Analysts expect many more companies to use most of their tax savings to buy back their own stock or to increase their dividends.

Related: Prices are going up. But it's good news for you

Fed officials said they don't expect wage growth to grow significantly if productivity remains low. A number of participants said a tighter labor market would likely translate to faster wage growth "at some point," according to the minutes.

Participants also noted that employers across the United States had difficulty filling openings or retaining workers with the unemployment rate at a 17-year low.

The meeting was the last chaired by Janet Yellen, who carefully guided the Fed through its first interest rate hikes after the crisis.

Markets widely expect the Fed to raise rates for the first time this year at its March meeting.

Indiana Coronavirus Cases

Data is updated nightly.

Cases: 708779

Reported Deaths: 13226
CountyCasesDeaths
Marion966191721
Lake51761946
Allen39224672
Hamilton34549405
St. Joseph34157541
Elkhart27356432
Vanderburgh22081394
Tippecanoe21853212
Porter17935299
Johnson17544374
Hendricks16822310
Clark12697190
Madison12353337
Vigo12219244
Monroe11469166
LaPorte11162204
Delaware10366184
Howard9664211
Kosciusko9134114
Hancock7990139
Bartholomew7893155
Warrick7691155
Floyd7563176
Wayne6906198
Grant6844171
Boone6556100
Morgan6405138
Dubois6085117
Marshall5786108
Dearborn570376
Cass5685102
Henry5579101
Noble542683
Jackson493569
Shelby479495
Lawrence4342118
Gibson429089
Harrison428570
Clinton419753
Montgomery418086
DeKalb411184
Whitley380239
Huntington379880
Miami372865
Knox366689
Steuben365757
Putnam353160
Jasper350946
Wabash347878
Adams338052
Ripley334668
Jefferson313180
White308454
Daviess289499
Wells286481
Decatur279092
Fayette277262
Greene270785
Posey268833
Scott261153
LaGrange253670
Clay253544
Randolph235680
Washington231031
Spencer228031
Jennings225047
Fountain208845
Sullivan207942
Starke204752
Owen192356
Fulton192039
Jay186429
Carroll185920
Perry180736
Orange177853
Rush170724
Vermillion166043
Franklin165635
Tipton161043
Parke144616
Blackford133831
Pike130334
Pulaski113845
Newton104234
Brown100140
Crawford97614
Benton97113
Martin82915
Warren79715
Switzerland7698
Union69910
Ohio55811
Unassigned0408

Ohio Coronavirus Cases

Data is updated nightly.

Cases: 1054807

Reported Deaths: 18991
CountyCasesDeaths
Franklin1225191356
Cuyahoga1074592069
Hamilton783261168
Montgomery50176996
Summit45557909
Lucas40298765
Butler37768570
Stark31513895
Lorain24246473
Warren23910293
Mahoning20946583
Lake20067362
Clermont19459229
Delaware18085130
Licking16149207
Fairfield15757197
Trumbull15627460
Medina14922259
Greene14706236
Clark13660293
Wood12806185
Portage12431196
Allen11352229
Richland11067198
Miami10548214
Muskingum8717127
Wayne8594209
Columbiana8569226
Pickaway8439121
Marion8390135
Tuscarawas8387240
Erie7600154
Hancock6730123
Ross6707146
Geauga6553146
Ashtabula6530165
Scioto6295101
Belmont5634158
Union558447
Lawrence5470102
Jefferson5343147
Huron5314114
Darke5273121
Sandusky5189120
Seneca5139120
Washington5087107
Athens503856
Auglaize476284
Mercer471984
Shelby456590
Knox4397108
Madison423959
Putnam421799
Ashland413488
Fulton410567
Defiance404296
Crawford3883101
Brown386955
Logan374476
Preble371098
Clinton362160
Ottawa357978
Highland347459
Williams328674
Champaign321557
Jackson308551
Guernsey307549
Perry290549
Fayette278048
Morrow275939
Hardin264764
Henry264366
Coshocton259857
Holmes253499
Van Wert239262
Pike233831
Gallia233446
Adams229152
Wyandot227553
Hocking209759
Carroll189447
Paulding168838
Meigs141738
Noble132937
Monroe128941
Morgan106823
Harrison105636
Vinton81614
Unassigned02
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