Federal Reserve officials in December approved their first interest rate hike in a year based in large part on market reactions to the presidential election and the anticipation of aggressive fiscal policy ahead, according to minutes of the meeting released Wednesday.
The summary showed that while the Federal Open Market Committee steers clear of political chatter, the fallout from Donald Trump's victory was on their minds. The FOMC unanimously approved a quarter-point hike that pushed the target range for its short-term lending rate to between 0.5 percent and 0.75 percent, and indicated a somewhat more aggressive path forward.
Indeed, markets had reacted sharply to the election outcome, pushing up bond yields and stock prices, and increasing expectations that the Fed would hike at the meeting, the minutes showed. While there is no mention of Trump, the impact from the election on markets and the economy seemed to be discussed extensively.
The committee in its summary of economic projections noted "substantial uncertainty" about fiscal policy ahead. However, members noted that "more expansionary fiscal policy" raised the possibility of "somewhat tighter monetary policy than currently anticipated."
"Asset price movements as well as changes in the expected path for U.S. monetary policy beyond December appeared to be driven largely by expectations of more expansionary fiscal policy in the aftermath of U.S. elections," the minutes said at one point.
In the period between the November and December meetings, "market participants saw a nearly 95 percent probability of a rate hike" as "most of the steepening of the expected policy path occurred following the U.S. elections, reportedly in part reflecting investors' perception that the incoming Congress and Administration would enact significant fiscal stimulus measures."