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Fed minutes show modest boost from tax reform, caution on yield curves

The potential benefit of newly enacted tax reforms led members of the Federal Open Market Committee members to raise their expectations for GDP growth in 2018 to 2.5% from 2.1%, according to minutes of their December meeting that were released Wednesday.

The committee voted Dec. 13 to raise the federal funds rate by 25 basis points to a target range of 1.25% to 1.5%, although two of nine members voted against the interest rate hike.

Members' summary of economic projections indicated that they see three more rate hikes in 2018 and two in 2019. Committee members, including the board of governors and Federal Reserve Bank presidents, projected the most likely outcomes for real GDP growth, the unemployment rate and inflation for each year from 2017 through 2020 and over the longer run.

On the potential effects of tax reform, many participants thought that the lower corporate rates "would likely provide a modest boost to capital spending," but several were uncertain about the impact on consumer spending, the minutes show.

"Reports from district contacts about both the manufacturing and service sectors were generally positive. In contrast, reports on housing and non-residential construction were mixed," and the energy sector activity continued to improve, the minutes said.

"Real economic activity appeared to be growing at a solid pace, buttressed by gains in consumer and business spending, supportive financial conditions, and an improving global economy," the minutes said.

Still, several participants urged continued monitoring of the slope of the yield curve, with some expressing concern that a possible future inversion of the yield curve, with short-term yields rising above those on longer-term Treasury securities, could portend an economic slowdown. They noted that inversions have preceded recessions over the past several decades, and a protracted yield curve inversion could adversely affect banks and other financial institutions and pose risks to financial stability.

"They do not seem overly concerned with the flattening of the yield curve; it is largely expected in the course of policy tightening. It's certainly not an impediment to them raising rates," said Steven Friedman, senior economist at BNP Paribas Asset Management, in an interview.