US interest rates could rise higher than expected this year, minutes from the US Federal Reserve's December meeting show

Francesca Washtell
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Janet Yellen Testifies Before House Financial Services Committee
Janet Yellen chairs the Federal Open Market Committee (Source: Getty)

The latest US Federal Reserve minutes have shown officials at the central bank believe interest rates could be forced to rise higher than expected this year, if tax cuts and aggressive fiscal policy are enacted under President-elect Donald Trump's administration.

Market reactions to the US presidential election and the expectation of aggressive fiscal policy drove officials to hike interest rates last month, the minutes also showed.

Rate-setting body the Federal Open Market Committee (FOMC) raised the target range for its federal funds rate from 0.5 to 0.75 per cent when it met on 13 and 14 December.

Read more: Janet Yellen is set to talk Trump today ahead of probable rate rises

In a summary of economic projections, the committee noted there was "substantial uncertainty" about the "size, composition, and timing of prospective fiscal policy changes".

It added though that "a more expansionary fiscal policy might raise aggregate demand above sustainable levels, potentially necessitating somewhat tighter monetary policy than currently anticipated".

Although the minutes steered clear of mentioning Trump, when it came to risks, "many" participants mentioned an increase in uncertainty "associated with fiscal, trade, immigration, or regulatory policies as a factor influencing their judgments".

Read more: Donald Trump blasts US Federal Reserve for creating a "false economy"

The dollar retreated from a 14-year high against a basket of currencies, known as the dollar index, after the minutes were released. It slipped to a session low of 102.39, though later recovered some ground.

The minutes sent US Treasury debt yields lower, as the policy meeting struck a more uncertain tone than had been expected. Both US 10-year and 30-year bond yields briefly touched session lows after the release.

"Today's FOMC monetary policy meeting minutes shows that the Federal Reserve remains cautious," said Manuel Ortiz-Olave, market analyst at Monex Europe.

"In particular, a number of members signalled increasing uncertainty over the timing, size and composition of any sort of fiscal policy stimulus announcement from the forthcoming Trump administration. The FOMC clearly does not want to precipitate ahead of unknown outcomes from such hypothetical measures, and as such have remained practically unchanged their individual economic outlooks in comparison to November’s meeting minutes."

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