WASHINGTON • It's a challenge Federal Reserve officials have not talked about in years: The economy could start to run faster than they anticipate, forcing them to raise interest rates at a quicker pace.
The long shadow stalking the committee's faster growth scenario is that of President-elect Donald Trump and his tax reform and fiscal stimulus proposals, although he was never mentioned in the minutes by name.
Minutes of the Fed's final 2016 policy meeting, published on Wednesday, showed United States central bankers preparing for a labour market that could stage a "sizeable undershooting" of the jobless level that keeps prices stable in the longer run.
That may push them to "raise the federal funds rate more quickly than currently anticipated" to keep inflation in check.
Almost all the participants "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", according to the minutes of the Dec 13-14 meeting. That said, the record of the meeting gave little direct hint of when US central bankers would raise rates next.
Members of the policy-setting Federal Open Market Committee last month increased the benchmark US lending rate for just the second time in a decade, and also signalled the likelihood of three rate increases this year, one more than previously expected.
That came as some surprise since the quarterly economic forecasts did not change appreciably, and it was seen as the Fed's first reaction to Mr Trump's Nov 8 election victory. Many analysts expect the central bank will have to raise rates even faster if Mr Trump's infrastructure spending and tax cuts fuel faster inflation.
Participants judged that the prospect of higher than expected growth - and therefore higher inflation - "increased as a result of prospects for more expansionary fiscal policies". About half incorporated an assumption of more expansionary fiscal policy in their forecasts.
"There is a little more conviction that the fiscal stimulus we will see out of the Trump administration will be positive for growth and inflation sooner rather than later," said MFS Investment Management chief economist Erik Weisman. "That's surprising because we don't know any of the particulars at this point."
Fed chief Janet Yellen has reminded her committee that the Fed has a dual mandate - stable prices as well as full employment, and that a tight labour market could help firm prices towards the target.
The minutes stressed: "With inflation still below the committee's 2 per cent objective, it was noted that downside risks to inflation remained and that a moderate undershooting of the longer-run normal unemployment rate could help return inflation to 2 per cent."
Officials estimate the level of full employment - or the unemployment rate consistent with labour supply and demand being in balance - at 4.8 per cent. Even so, they estimate that growth of 2.1 per cent in 2017 would be sufficient to push the jobless rate to 4.5 per cent in the final quarter of the year. BLOOMBERG, AGENCE FRANCE-PRESSE