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US Fed officials say they may need to raise rates 'fairly soon'

US central bankers say they may need to increase the key lending rate "fairly soon," but appear split on the timing amid uncertainty over President Donald Trump's tax and spending policies, the minutes of their last meeting show.

[WASHINGTON] US central bankers say they may need to increase the key lending rate "fairly soon," but appear split on the timing amid uncertainty over President Donald Trump's tax and spending policies, the minutes of their last meeting show.

The "hawks" at the Federal Reserve are more concerned about the threat of rising inflation, especially if tax cuts and spending fuel the economy, but the "doves" warn of the risk of raising interest rates based on policies that have not been announced, and whose implications cannot yet be measured.

The Fed officials said their outlook for the economy and interest rates had not changed much since December, when they indicated three rate hikes were likely this year, according to the minutes of the January 31-February 1 monetary policy meeting published Wednesday.

In its first meeting since Mr Trump took office, the policy-setting Federal Open Market Committee said it continues to expect to need only "gradual adjustments" in interest rates to hit the two percent inflation target, if the economy continues to grow at the current moderate pace.

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However, the minutes showed a decided split among the central bankers over whether there was a greater risk of inflation, which would make delaying a rate increase more perilous, or if they could afford to hold off to gauge the impact of Mr Trump's policies.

Mr Trump has promised to deliver a major tax cut plan very soon and also pledged to implement a large infrastructure spending project.

The central bankers continue to see "heightened uncertainty" about the timing and impact of those policies, and pointed to potential risks if the measures fuel inflation.

The minutes said "many participants expressed the view that it might be appropriate to raise the federal funds rate again fairly soon" if the labor market and inflation continues to develop as expected.

That statement will add to rising expectations the FOMC might increase the benchmark rate at the March 14-15 meeting.

The FOMC raised the key federal funds in December rate for only the second time in a decade.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said, "the FOMC remains split on the state of the economy right now - specifically, the true tightness of the labor market and, hence, the risk it poses to inflation - and on how the Fed should respond."

Mr Shepherdson said he thinks the next increase is more likely in May than March, unless there is a big increase in employment in February, but other analysts rate the chances for a March move at better than 50 per cent.

IHS Markit said the minutes and other recent comments "signal that a March rate hike is a strong possibility." If inflation and employment data for this month are "in line with the recent trends, the Fed may have no excuses to hold off." Fueling the debate among policymakers is the "heightened uncertainty regarding the size, composition, and timing of possible changes to fiscal and other government policies, and their net effects on the economy and inflation," the minutes said.

The officials added that it would take "some time" for the outlook to become clearer.

Many businesses in contact with the Fed have expressed increased optimism because of the expectation of possible corporate tax cuts.

Those expectations and the prospect of increased government spending have also helped boost stock prices to record levels in seven of the last eight trading sessions.

But some of the Fed officials cautioned that those policy changes, which could boost growth but also fuel inflation, "might not materialise." Some on the FOMC said the uncertainty should not deter them from raising rates.

However, others warned of the risk of making a move "in anticipation of policy proposals that might not be enacted or that, if enacted, might turn out to have different consequence for economic activity and inflation than currently anticipated."

Several participants warned there was a high risk unemployment could drop too low, below the current 4.8 per cent level, especially if the economy grows faster than expected, which means the Fed "might need to raise the federal funds rate more quickly... to limit the buildup of inflationary pressures."

But others continued to see downward pressure on prices and said "policymakers would likely have ample time to respond if signs of rising inflationary pressures did begin to emerge."

All the participants agreed on the need to "closely monitor inflation indicators and global economic and financial developments." Other risks to the economy includes the continued appreciation of US dollar, they said.