The FOMC minutes released today left little doubt about the outlook for the funds rate. It is headed higher in 2018–the only question is how much higher. The consensus forecast had been two or three 25 basis point increases. Now, that consensus will probably become three or four increases, pushing the rate a full percentage point higher by year-end.
Healthier economic data, a tax cut and better growth overseas were cited by the majority of the Committee as reasons to expect that “the rate of growth in 2018 would exceed their estimates of its sustainable longer-run pace.” This at a time when labor markets are already tight, wages appear to be strengthening and more businesses report, “some more ability to raise prices to cover higher input costs”.
As if that weren’t enough, many members of the Committee think that financial conditions have remained very easy, despite the increases in the fed funds rate. In previous minutes, only a few expressed that view. A number of participants said they had “marked up” their growth forecasts and several others worried that the upside risk to the outlook may have increased. Thus, a majority agreed that further rate increases would be appropriate–a slightly more aggressive wording than in earlier minutes.
The bond market did not like the tone of these minutes, for good reasons. It correctly interpreted them to suggest a much higher probability of a funds rate well above 2% by year-end. That probability was not taken very seriously until this afternoon.