Fed Sees Rate Increases in 2018 but Lacks Consensus on Frequency

WASHINGTON — The Federal Reserve has entered 2018 without a clear plan for raising its benchmark interest rate and with the added uncertainty of an imminent change in its leadership.

An account of the Fed’s final meeting of 2017, which the central bank published on Wednesday, said that officials generally agreed that the Fed should continue to raise its benchmark interest rate in the new year. But the frequency of future hikes remains a question, with a range of views among officials.

Six of the 12 officials on the Federal Open Market Committee predicted in December that the Fed would raise rates three times this year. But three other officials predicted a pair of hikes, and three officials said the Fed would raise rates four times.

The decision about how often to raise rates will be made under new management: The Fed’s chairwoman, Janet L. Yellen, plans to step down in early February; her successor, the Fed governor Jerome H. Powell, is awaiting Senate confirmation.

Last year was the first since the 2008 financial crisis that the Fed articulated a clear plan for monetary policy, and stuck with it. The central bank said it would raise rates three times and did exactly that, with the third rate hike coming at its final 2017 meeting in December.

At that meeting, the Fed demonstrated its optimism about the economy by raising its benchmark interest rate to a range between 1.25 percent and 1.5 percent.

“Participants saw the outlook for economic activity as having remained strong or having strengthened since their previous meeting, in part reflecting a modest boost from the expected passage of the tax legislation under consideration,” said the account released on Wednesday, after the standard three-week delay.

Officials saw few serious dangers on the horizon, the account said. Most expected inflation to rebound from a long period of sluggishness and were not overly concerned about rising asset values.

The Fed also expected a modest economic boost from the tax cuts President Trump signed into law at the end of the year. The account said many officials predicted increases in both consumer and business spending, although they expressed uncertainty about the magnitude.

One new item on the agenda at the December meeting: Concern about a technical indicator called the yield curve, which compares the interest rates on the different kinds of borrowing by the federal government, which range from one-week loans to 30-year loans.

In general, investors demand higher interest rates on longer-term loans, but the difference between short-term rates and long-term rates has been compressing. When short-term rates exceed long-term rates, the yield curve is said to be “inverted.” Historically, that often happens before a recession.

Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, voted against raising the Fed’s benchmark rate at the December meeting. He said in a statement that the flattening of the yield curve indicated that the Fed was moving too quickly.

“In response to our rate hikes, the yield curve has flattened significantly, potentially signaling an increasing risk of a recession,” Mr. Kashkari said.

The minutes said that most Fed officials did not share Mr. Kashkari’s concerns, judging instead “that the current degree of flatness of the yield curve was not unusual by historical standards.”

The account also noted that some officials thought further flattening of the yield curve “would not necessarily foreshadow or cause an economic downturn.”

But the minutes said that the Fed would continue to monitor the issue, which is also increasingly on the minds of some financial market participants.

Fed officials also continued to debate the past and future movements of inflation, which tends to rise in a strengthening economy. Last year marked the sixth straight year that the Fed fell short of its goal of 2 percent annual inflation. A minority of officials sees the persistent sluggishness as evidence the economy remains weak.

“I am concerned that too many observers have the impression that our 2 percent objective is a ceiling that we do not wish inflation to breach,” Charles Evans, president of the Federal Reserve Bank of Chicago, said in a statement last month explaining his vote against the rate increase at the December meeting.

The minutes said a few officials thought plans for three rates hikes in 2018 were overly aggressive and might keep inflation below 2 percent.

A few other officials, the minutes said, were concerned that the Fed may not be ready to raise rates fast enough. They noted that the economy is growing more quickly, money remains easy to borrow and the supply of workers is dwindling — all factors that could fuel faster inflation.

Content originally published on https://www.nytimes.com/2018/01/03/business/economy/fed-rate-increases.html by BINYAMIN APPELBAUM