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Fed minutes show optimism increasing at January meeting

Members of the Federal Open Market Committee declined to raise interest rates at their January meeting, but were more optimistic about the economy than during their December meeting, according to minutes released Wednesday of the Jan. 30-31 meeting.

"A number of participants indicated that they had marked up their forecasts for economic growth in the near term relative to those made for the December meeting in light of the strength of recent data on economic activity in the United States and abroad, continued accommodative financial conditions, and information suggesting that the effects of recently enacted tax changes — while still uncertain — might be somewhat larger in the near term than previously thought," the minutes said.

Inflation data in recent months also has generally pointed to a gradual rise in inflation, on which committee members have been keeping a close eye. That optimism makes it more likely that rate hikes, or "further gradual policy firming," are imminent, the minutes said.

Interest rates are now in the range of 1.25% to 1.5%, but many observers expect that to rise after the March 21 meeting, which includes a news conference.

"I think it is reasonable for the market to price for three hikes," said James Athey, senior investment manager at Aberdeen Standard Investments, in an interview. "Definitely there is more confidence in the recovery. To all intents and purposes, that reflects how investors are feeling," said Mr. Athey, who sees the chance of a fourth hike in 2018, particularly "if the data continue to perform as it has been."

While the tone reflected in the minutes was a bit more positive than the market had expected, Janelle Woodward, global co-head of income at BMO Global Asset Management, said that much of the data "has already been recognized" by the market, which saw a small steepening of the yield curve. She noted in an interview that in 2017, inflation data "was hot and then softened. I think we have to step back and look longer term."

The minutes also show "a commitment to use the word 'gradual.' I think the Fed is going to continue to be data dependent," she said.