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Fed minutes: Officials were moved by Trump win before December hike

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."

Why they now see 3 hikes in 2017

"Many" officials worried that letting the unemployment rate fall too far without hiking rates could necessitate a more aggressive path ahead. In line with that thinking, the committee increased its projections for 2017 from two rate hikes to three.

"There's still a lot of uncertainty with the incoming Trump administration. I think we're just going to sit tight until after Jan. 20," said Peter Ng, senior FX trader at Silicon Valley Bank. "If these actions do come to fruition, then we'll probably get a faster response from the Fed."

But it was more than the usual factors weighing into the decision.

Members looked at what the future held and figured that the possibility for more aggressive growth had to be taken into account. Trump wants to spend as much as $1 trillion on infrastructure while cutting taxes and reducing regulations, the latter of which is "posing upside risks" to some members' economic forecasts.

"Most participants attributed the substantial changes in financial market conditions over the intermeeting period — including the increase in longer-term interest rates, the strengthening of the dollar, the rise in equity prices, and the narrowing of credit spreads — to expectations for more expansionary fiscal policies in coming years or to possible reductions in corporate tax rates," the minutes said.

However, the economic projections overall nudged only slightly higher, with the committee now indicating that GDP growth would hit 2.1 percent in 2017 as opposed to the 2 percent estimate in September. They did indicate that those projections could change.

Almost all members "also indicated that the upside risks to their forecasts for economic growth had increased as a result of prospects for more expansionary fiscal policies in coming years," the minutes said.


Janet Yellen
Getty Images
Janet Yellen

The downside risks to their forecasts included a possible trade war under Trump, as well as the possibility that his policies may not live up to expectations.

Taken together, the Fed still expects a fairly gradual normalization of rates.

The rate hike was the first in a year and only the second in more than 10 years. While the unemployment rate has tumbled, inflation has remained stubbornly below the Fed's 2 percent target.

At the meeting, members noted that inflation had firmed somewhat thanks to a rise in energy prices but likely would remain "marginally below" the target through 2019. However, the decision to hike came because members believe there was "sufficient progress" toward the longer-term objective.