Minutes of the U.S. Federal Reserve's meeting early this month showed the central bank was on track to raise interest rates as soon December, even before Donald Trump's election as president led to a surge in inflation expectations.
The minutes released Wednesday signaled that a strengthening U.S. economy puts policy makers on a course to raise rates "in the near term," with some participants saying a move at the next meeting was needed to preserve credibility. The Fed hasn't changed its rate all year, even as several investors have criticized the central bank for failing to normalize monetary policy after years of holding borrowing costs close to zero.
"Participants generally agreed that the case for increasing the target range for the federal funds rate had continued to strengthen," the minutes from the Nov. 1-2 meeting read.
Futures prices show that investors consider a rate hike at the Fed's Dec. 13-14 meeting a near-certainty. The Fed hasn't increased its benchmark since December 2015, which was the first hike since rates were cut to near zero following the financial crisis of 2008. The target is currently set at 0.25% to 0.5%.
Trump's election on Nov. 8 spurred a dramatic climb in Treasury yields, on speculation that his plans to cut taxes and increase infrastructure spending would lead to higher inflation. Prior to the election, some Fed policy makers felt that conditions did not warrant an immediate need to tighten policy, according to the minutes. The election wasn't mentioned in the latest minutes.
The latest commentary from the Fed supports market expectations that the central bank will raise rates in December, Regions Financial chief economist Richard Moody said in an interview. Based on futures prices, most investors project that the rate will rise by a quarter percentage point at the December meeting.
"The meeting was a non-event, and the minutes too," Moody said.
While few traders expected the Fed to take action in the week before the election, policy makers said there was no need to rush; some members of the central bank's rate-setting committee expressed the view that there remained "modest slack" in the labor market.
The central bank noted that the economy had strengthened in the third quarter, when gross domestic product grew at an estimated 2.9% annual rate, but pointed out that much of the gain represented one-off benefits from inventory accumulation and agricultural investment, mostly in soybean production.
Stockholders of financial companies like JPMorgan Chase (JPM) and Bank of America (BAC) have been openly rooting for higher rates. The prospect of further Fed increases has helped push up those stocks by more than 10% since the election.