Members of the Federal Reserve debated just how much the Republican tax bill would boost the economy as the legislation sped toward passage in December, according to notes released Wednesday from the central bank’s Dec. 12-13 meeting.
Chairwoman Janet Yellen and other Fed officials anticipated “a modest boost from the expected passage of the tax legislation under consideration,” according to the minutes of the monetary policy meeting. President Trump signed the bill days later.
The prospect of the tax cuts adding to economic growth was one of the factors that led the Fed members to raise their target interest rate at the meeting and to plan for further rate hikes in the months ahead.
Nevertheless, the officials weren’t sure about how much the tax plan would increase economic output.
They expressed uncertainty about how much consumers and businesses would respond to the tax cuts, according to the minutes. Some of the Fed’s contacts reported caution about investing more with the tax savings or that they planned to use the money to pay out dividends or buy back shares rather than making capital expenditures.
At least several Fed members raised the prospect of the lower personal tax rates enticing more people into the workforce, but the group wasn’t sure how significant that effect would be.
At a press conference following the meeting in December, Yellen suggested that the tax cuts wouldn’t do much to alter the Fed’s plans for monetary policy.
She also hinted at the possibility that the tax overhaul could increase the size of the economy by increasing the supply of work and business capital. In that case, economic activity would increase “without creating a need to tighten monetary policy to offset that,” she said.