Trump policies may 'necessitate' faster rate hikes: Fed

By Ovunc Kutlu

NEW YORK

President-elect Donald Trump's economic policies may "necessitate" faster interest rate hikes, minutes from the Federal Open Market Committee's (FOMC) December meeting showed Wednesday.

"Many participants noted that there was currently substantial uncertainty about the size, composition, and timing of prospective fiscal policy changes, but they also commented that a more expansionary fiscal policy might raise aggregate demand above sustainable levels, potentially necessitating somewhat tighter monetary policy than currently anticipated," the minutes read.

"Expansionary fiscal policy" and "fiscal policy changes" the FOMC mentioned refer to Trump's proposed economic policies that aim to increase government spending on infrastructure, lower corporate taxes, and introduce more deregulation.

With hopes of deregulation, indexes in the U.S. stock market have gained more than 10 percent since Trump's election, which means the Wall Street have already positioned itself against a rate hike.

Higher infrastructure spending and lower taxes, in addition, are expected to boost the economy, with increased employment and wages, which are hoped to trigger higher consumer spending.

More consumption would increase inflation towards the Fed's target of 2 percent. However, the Fed could also overshoot its target if inflation rises more rapidly than anticipated.

In this case, the FOMC may find it necessary to have a tighter monetary policy, which means it may raise interest rates more quickly this year.

"Many participants noted that the effects on the economy of such policy changes, if implemented, would likely be partially offset by tighter financial conditions, including higher longer-term interest rates and a strengthening of the dollar," the FOMC minutes noted.

The Fed said in December that it forecasts three rate hikes in 2017.

The central bank increased its benchmark interest rate last month by 0.25 percent, marking its first raise since December 2015 and only the second in a decade.