Fed says growing economy, inflation will make case for rate hike

The Federal Reserve expects the U.S. economy to keep improving, driving up wages and prices along the way, according to minutes released Wednesday from the bank’s January meeting.

Several members of the Fed’s Federal Open Markets Committee, which sets U.S. monetary policy, boosted how much they expected the U.S. economy to grow in 2018. Fed officials said the better-than-anticipated growth in fourth quarter of 2017, consistent job gains and stimulus from the GOP tax bill factored into their decisions.

The Fed’s confidence in the economy’s direction means the bank will likely follow through with expected interest rate increases meant to prevent the economy from overheating and bring monetary policy back in line with historic neutral levels.

“While participants continued to expect economic activity to expand at a moderate pace over the medium term, they anticipated that the rate of economic growth in 2018 would exceed their estimates of its sustainable longer-run pace and that labor market conditions would strengthen further,” according to the Fed minutes.

Some Fed officials noted that they’d reviewed data “suggesting that the effects of recently enacted tax changes — while still uncertain — might be somewhat larger in the near term than previously thought.”

Some committee members aired concerns over the potential risks of an overinflated stock market and unsustainably low employment, while others were less convinced by the new data indicating a stronger economy.

But most Fed officials largely agreed that the bank would need to raise interest rates at a moderate pace to keep the economy in a comfortable state.

“A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate,” according to the minutes.

The Fed’s Jan. 30-31 meeting occurred before the release of the January job report that exceeded economists’ expectations. The economy added 200,000 jobs — 20,000 more than had been forecast — and wages grew 2.9 percent over the past 12 months, the highest rate since 2009.

U.S. stocks dropped after the Fed minutes were released despite a brief initial rally. The Dow Jones industrial average fell 130 points on the day (0.5 percent) while the Nasdaq and S&P 500 suffered 0.2 and 0.6 percent losses, respectively.

Investors fear that low unemployment, increasing U.S. growth and rising wages will spur the Fed to raise interest rates at a quicker pace, which would boost the cost of borrowing money. Bond yields spiked after the Fed minutes were released as traders braced for the Fed to follow through on rate hikes.