Treasuries Fall as Fed Minutes Point to Risks From Fiscal Policy

Treasuries Fall as Fed Minutes Point to Risks From Fiscal Policy

The minutes were expected to provide justification for the increase in USA interest rates last month and could reinforce the market's general belief that the economy can absorb further tightening.

Members of the Federal Open Market Committee (FOMC), the policymaking arm of the Federal Reserve, were in agreement at their December meeting that it was time to raise the funds target rate by 25 basis points for the first time in a year, according to the FOMC minutes for the December meeting released Wednesday. But the unanimous decision didn't come without healthy discussion among members about the results of the USA election and potential impact on monetary policy.

WASHINGTON-President-elect Donald Trump's name doesn't appear in the minutes from the Federal Reserve's December meeting.

The committee in its summary of economic projections noted "substantial uncertainty" about fiscal policy ahead. Trump on the campaign trail pledged massive infrastructure and stimulus spending, which would be an unorthodox move given the quickly improving jobs market. In December 2015, the increase from near zero was the Fed's first in years.

At the same time, many Fed officials also cited downside risks to the economy, including Trump's possible trade restraints, a strong dollar that hurts exports and the Fed's limited ability to respond to economic weakness if a rise in interest rates derails the recovery.

Treasuries Fall as Fed Minutes Point to Risks From Fiscal Policy

"About half of the participants incorporated an assumption of more expansionary fiscal policy in their forecasts", the minutes said.

"There's a lot of hype and expectation built in right now".

"The spike down to a 4.6% unemployment rate seems to have sapped even the most diehard doves of any energy to continue concocting arguments to support the notion that significant labor market slack remains", said Stephen Stanley, chief economist at Amherst Pierpont Securities. "They have their credibility to maintain so they're not going to give hints about what they'll do until they're sure that's where they want to go". That's expected to force employers to bid up wages to attract a smaller pool of available workers, potentially spurring inflation that eventually exceeds the Fed's annual 2% target.

In the year ahead, FOMC members expect the labor market to strengthen "somewhat further" over the medium term, though they anxious a "sizable" risk of undershooting the longer-run normal employment rate had increased and a swifter pace of rate hikes could be needed to limit a potential buildup of inflation.

With unemployment in the USA already a low 4.6 per cent, most FOMC participants believe the labour market is at or close to its full employment objective, even before Trump and the Republican-controlled Congress embark on their economic reform plans.

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