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Tax reform could cause Fed to speed up rate hikes

Fed minutes show most on board with raising federal funds rate

Minutes released Wednesday by the Federal Reserve showed that the Federal Open Markets Committee could move at a quicker pace due to tax reform.

Just before Christmas, President Donald Trump signed the tax reform bill into law which some economist predict could spur economic growth over the next few years.

While the Fed forecasts a median growth of 2.5% in 2018, the minutes showed most members will raise their expectations due to tax reform, according to an article by Akin Ayedele for Business Insider.

From the article:

Lower taxes means Americans will extra cash to spend, which would be good for the economy. Just how much more they decide to spend is still uncertain for the Fed. On the corporate side, business owners who were surveyed said some companies would use the extra cash to expand their businesses, but most would likely use it to pay down debt or buy back their stock.

The Fed announced its final rate hike of 2017 on Wednesday at the end of its December FOMC meeting, but implied more rate hikes are still to come in 2018 and beyond. After increasing the federal funds rate 25 basis points to a target rate of 1.25% to 1.5%, the Fed projected it would raise rates three times in 2018.

However, experts then predicted the Fed will later revise its rate hike forecast from three times in 2018 to four after they increased their GDP estimates.

One expert confirmed he continues to expect the Fed to increase its forecast for rate hikes in 2018.

“Overall, Fed officials re-affirmed at this meeting that they anticipate raising interest rates three times in 2018, matching the tightening in 2017, but we still anticipate that a slightly faster than expected rebound in core inflation will mean we eventually see four rate hikes in 2018,” Capital Economics Chief Economist Paul Ashworth said.

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