Some Federal Reserve policymakers raised concerns last month about the potential for higher inflation and financial instability because of stronger economic growth triggered by the recently enacted tax cuts, according to an account of the meeting released on Wednesday.
Early signs that the effects of the tax cuts “might be somewhat larger in the near term than previously thought,” led some members of the central bank’s Federal Open Market Committee to boost their forecasts for economic growth this year from estimates they had made in December, according to minutes of the Jan. 30-31 meeting released with the usual three-week lag.
Stronger growth coming at a time when the economy is believed to be at full employment could lead to rising wages that would push inflation higher. That worried “a couple” of the meeting participants, the minutes said.
They “noted that a step-up in the pace of economic growth could tighten labor market conditions even more than they currently anticipated, posing risks to inflation and financial stability associated with substantially overshooting full employment,” the minutes said.
Although other Fed officials said they continued to be worried about persistently low inflation instead of high inflation, a majority of the meeting participants agreed that a stronger outlook for economic growth “raised the likelihood” that further gradual increases in the central bank’s benchmark short-term interest rate would be warranted.
To signal that, Fed policymakers decided to slightly change the wording used in recent statements. Instead of saying the improving economy would warrant “gradual increases” in the benchmark interest rate, the January statement said the economic improvements would warrant “further gradual increases.”
The meeting predated the recent financial market turmoil, which was triggered by fear of higher inflation and interest rates as the economy heats up. Policymakers at the January meeting debated the effects of the tax cuts on wage growth, with some anticipating an uptick.
The meeting took place a few days before the Labor Department reported that average hourly earnings had surged in January to 2.9% over the previous 12 months, the largest year-over-year gain since 2009. That report spooked investors and triggered the market gyrations.
Policymakers voted unanimously last month to hold the federal funds rate at between 1.25% and 1.5%. The meeting was the last presided over by Fed Chairwoman Janet L. Yellen. Her successor, Jerome H. Powell, a Fed official who voted at the January meeting, took over as chairman a few days later.
Fed officials had indicated after their December meeting that they expected to hike the interest rate 0.25 percentage points three times this year, with investors betting the first increase will take place in March.
The Republican tax cut legislation reduced taxes by $1.5 trillion over the next decade, with most of the benefits going to large corporations and the wealthy. Several Fed policymakers “expressed considerable uncertainty” about the effects of the tax cuts on business investment and wage growth.