Fed to Raise Bench Mark Rate in 2018, but Lacks Consensus on Frequency

WASHINGTON — The Federal Reserve has entered 2018 without a clear plan for raising its benchmark interest rate and with the added uncertainty of an imminent change in its leadership.

An account of the Fed’s final meeting of 2017, which the central bank published Wednesday, said officials generally agreed that the Fed should continue to raise its bench mark rate in the new year. But Fed officials expressed a range of views about the frequency of future hikes.

Six of the 16 officials on the Federal Open Market Committee predicted during the December meeting that the Fed would raise rates three times in 2018. But six officials predicted two hikes or fewer and four officials predicted the Fed would raise rates at least four times.

The decision about how often to raise rates will be made under new management. The Fed’s chairwoman, Janet Yellen, plans to leave the Fed in early February; her nominated successor, the Fed governor Jerome H. Powell, is awaiting a Senate confirmation vote.

Last year was the first since the 2008 financial crisis that the Fed articulated a clear plan for monetary policy and stuck with it. The central bank said it would raise rates three times and did exactly that, with the third hike coming in December.

The decision at that meeting to raise the bench mark rate into a range between 1.25 and 1.5 percent reflected the Fed’s optimistic expectations for the economy, the account said.

“Participants saw the outlook for economic activity as having remained strong or having strengthened since their previous meeting, in part reflecting a modest boost from the expected passage of the tax legislation,” said the account, which was released after a standard three-week delay.

Officials saw few serious dangers on the horizon, the account said. Most expected inflation to rebound from a long period of sluggishness and were not overly concerned about rising asset values. The S&P 500 stock index has climbed 19 percent over the last year.

The Fed also predicted there would be a modest economic boost from the tax cuts President Donald Trump signed into law at the end of the year. The account said that many officials predicted increases in both consumer and business spending, although they expressed uncertainty about the magnitude.

In the December round of economic projections, the median forecast of Fed officials was that the economy would grow 2.5 percent in 2018, up from a median forecast of 2.1 percent in September. The tax cut was the primary reason for the higher estimate, Yellen said at a news conference.

The estimate reflected the view of Fed officials that the benefits of the $1.5 trillion tax cut will be attenuated by higher interest rates, as the federal government seeks to borrow more money.

The account also said that some firms were likely to give the windfall to investors or use the money to pay down debts rather than making the types of investments likely to expand the economy.

The internal debate about how quickly to raise rates revolves around the pace of inflation. Last year was the sixth straight year the Fed fell short of its 2 percent inflation target.

“One thing is for certain and that is that inflation has become the most important economic variable steering the Fed’s policy,” wrote Chris Rupkey, chief financial economist at MUFG.

Some officials have sought to suspend rate hikes until inflation shows greater strength. Charles Evans, president of the Federal Reserve Bank of Chicago, voted against the December rate hike, and said in a post-meeting statement that the Fed needed to demonstrate a commitment to its target.

“I am concerned that too many observers have the impression that our 2 percent objective is a ceiling that we do not wish inflation to breach,” Evans said in the statement.

Most Fed officials, however, expressed confidence that continued growth would increase inflation. That group includes the plurality of officials favoring three rates hikes next year.

It also includes the minority of officials who are concerned that the Fed may not be raising rates fast enough. They noted that the economy is growing more quickly, money remains easy to borrow and the supply of workers is dwindling — factors that could fuel faster inflation.

One new item on the agenda at the December meeting: Concern about a technical indicator called the yield curve, which compares the interest rates on the different kinds of debt issued by the federal government, which borrows money for periods ranging from one month to 30 years.

In general, investors demand higher interest rates on longer-term loans, to compensate for greater uncertainty, but the difference between short-term rates and long-term rates on federal debt has been compressing. When short-term rates exceed long-term rates, the yield curve is said to be “inverted.” Historically, that has often happened before a recession.

Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, voted against the December rate hike. He said in a post-meeting statement that the flattening of the yield curve indicated the Fed was moving too quickly. “In response to our rate hikes, the yield curve has flattened significantly, potentially signaling an increasing risk of a recession,” Kashkari said.

The minutes said most Fed officials did not share Kashkari’s concerns, judging instead “that the current degree of flatness of the yield curve was not unusual by historical standards,” and that further flattening “would not necessarily foreshadow or cause an economic downturn.”