Fed Eyes Increase Interest Rates to Appease Soaring Inflation
Jan 05, 2017 05:11 PM EST
The Federal Reserve (Fed) might have to increase interest rates faster than previously thought to prevent rapidly falling unemployment from fueling soaring inflation, according to minutes of the Fed's December 13-14 meeting. US economy has recovered lately and unemployment has fallen.
Fed officials also think that it was too early to judge the consequences of Donald Trump's proposed fiscal stimulus, but it carried risks for stronger economic growth and inflation.This is the reason why the Fed, in addition to increasing its benchmark interest rate, ratcheted up its forecast from two to three rate hikes in 2017. That surprised investors and helped slow down a market rally.
Jobless rate has been falling and Trump has many projects in mind
The 4.6 percent jobless rate is already is already very low and it forces employers to bid up wages to attract more available workers, thus, spurring inflation that eventually exceeds the Fed's 2 percent target. Annual wage gains have revitalized lately but, at 2.5 percent, remain measured.
Fed officials also mentioned Trump's plan to reduce taxes, spend as much as $1 trillion to improve the nation's infrastructure and increase military expenditures. The officials emphasized "their considerable uncertainty about the timing, size, and composition" of the proposal, which would need the approval of the Congress.
Fed officials analyze the potential problems
Many Fed officials feel a bit uncomfortable about the potential risks to the economy, including Trump's possible commercial restraints, a strong dollar that hurts U.S. exports and the Fed's limited ability to respond to economic vulnerability if a hike in interest rates derails the recovery. Fed officials highlighted the low growth of the productivity in the policy discussion, and believe that it can be a brake for the economic recovery of United States.
Federal Reserve Chair, Janet Yellen, has declared that government spending on programs that increase the productive capacity of the economy would be useful, such as training, enhanced education, and workforce development.