Federal Reserve officials grew more positive on the economic outlook, citing “substantial underlying economic momentum,” and were increasingly optimistic about achieving their inflation target, according to minutes of last month’s policy meeting.
Fed officials “anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labor market conditions would strengthen further,” the minutes of their Jan. 30-31 meeting released in Washington on Wednesday showed. A number of participants “indicated that they had marked up their forecasts for economic growth in the near term relative to those made for the December meeting.”
“A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate,” the minutes said.
U.S. central bankers estimated economic growth at 2.5 percent for 2018 in December. Private analysts have boosted their outlook to 2.6 percent, according to the median forecast in a Bloomberg News survey. Stocks peaked on Jan. 26 before tumbling at the start of February, and longer-term government bond yields began to climb on the prospects of larger amounts of Treasury issuance.
Also in the January meeting, the Fed left the rate unchanged at a range of 1.25 percent to 1.5 percent, and said inflation was expected to “move up” this year and stabilize around the 2 percent target “over the medium term.”
Participants also discussed numerous uncertainties about the outlook. Several cautioned that “imbalances in financial markets may begin to emerge as the economy continued to operate above potential,” the minutes said. Fed officials also speculated on whether the tax cuts would translate into higher compensation for employees.
“It was noted that the pace of wage gains might not increase appreciably if productivity growth remains low,” the minutes said. “That said, a number of participants judged that the continued tightening in labor markets was likely to translate into faster wage increases at some point.”
The Federal Open Market Committee signaled in its post-meeting statement that it expected “further gradual increases” in the benchmark lending rate after forecasting three hikes for 2018 in December. Minneapolis Fed President Neel Kashkari said on Wednesday that particular phrasing was significant.
“We debate each word change in the statement — a lot of debate goes into those — and I think ‘further’ is intended to say continuing the current path that we’re on,” he said in a Bloomberg interview with Michael McKee before the minutes were published.
The minutes also explained the new wording: “Members agreed that the strengthening in the near-term economic outlook increased the likelihood that a gradual upward trajectory of the federal funds rate would be appropriate. They therefore agreed to update the characterization of their expectation for the evolution of the federal funds rate in the post-meeting statement to point to ‘further gradual increases.'”
Since Fed officials last met in January, data showed wages rising faster than forecast, with the unemployment rate holding at 4.1 percent. The consumer price index, excluding food and energy, was 1.8 percent for the year ending January, and retail sales unexpectedly declined from the prior month.
The January meeting was the last attended by Chair Janet Yellen, who was succeeded by Jerome Powell.