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Fed officials see economic boost from tax cuts, but unsure how large it would be


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Fed officials see economic boost from tax cuts, but unsure how large it would be

Federal Reserve officials believe the U.S. economy will get a significant boost from the tax cuts President Donald Trump signed into law, but they are uncertain about how large that jolt will be, according to minutes of their latest meeting.

The minutes of the Federal Open Market Committee last month, which also showed a strengthening economy and made Fed officials more confident about their path on gradual interest rate hikes, reflect some uncertainty about how businesses will react to the tax windfall they are receiving.

The wave of large companies that have announced wage increases and bonuses as a result of the news did not go unnoticed, though "a few participants" said the compensation increases could largely be one-time bonuses instead of a permanent wage increase. Still, a number of officials thought wages are due to rise quickly anyway given tightening labor markets.

Fed officials reported that their business contacts are "generally upbeat about the economy," listing the tax cuts and a brighter global economic outlook as two reasons why. Businesses also are planning on furthering their investments, with manufacturers in some districts boosting production because of increased orders.

Still, the minutes show, several FOMC participants "expressed considerable uncertainty about the degree to which changes to corporate taxes would support business investment and capacity expansion."

"According to these participants, firms may be only just beginning to determine how they might allocate their tax savings among investment, worker compensation, mergers and acquisitions, returns to shareholders, or other uses," the minutes say.

Overall, though, officials see growing confidence among consumers and businesses, which helped a number of participants bump up their projections for GDP growth in the coming year. In fact, the minutes say, a number of participants think that the effects of the tax changes "might be somewhat larger in the near term than previously thought."

A few Fed officials also reported that business contacts in their districts have said they now feel more able to increase prices, as their own costs to operate increase. A few participants, though, also brought up the possibility that the tax cuts could actually lead to companies looking to "cut prices in order to remain competitive or to gain market share, which could result in a transitory drag on inflation."

And that could pose yet another challenge as the Fed tries to let inflation rise further and reach its 2% goal, though most Fed officials are still confident that will happen, the minutes show.