Federal Reserve officials said a strengthening economy and higher inflation could lead to earlier and faster interest rate hikes than previously expected, with some policymakers also choosing to start shrinking the balance sheet shortly thereafter.
“Participants generally noted that, given their individual outlook for the economy, the labor market and inflation, it may be justified to increase the federal fund rate sooner or at a faster rate than participants previously expected,” according to minutes that Wednesday of was published. the December 14-15 meeting of the US Federal Reserve’s policy-making Federal Open Market Committee, when it turned to a more aggressive anti-inflationary stance.
“Some participants have also noted that it may be appropriate to start reducing the size of the Federal Reserve’s balance sheet relatively soon after they start raising the federal fund rate,” the minutes read.
The S&P 500 stock index extended declines after the release and was on track for its biggest loss in more than a month. Treasuries also extended losses and the dollar reduced its decline.
At the end of the December meeting, the FOMC announced that it would end the Fed’s bond buying program at a faster pace than initially outlined at the previous meeting in early November, citing rising risks of inflation. The new schedule puts the central bank on track to complete purchases in March.
Fed officials were also unanimous in expecting to start raising rates this year, according to anonymous projections published after the meeting. This was a shift from the previous round of forecasts in September, which showed that the FOMC was evenly divided on demand at the time.
Investors expect the Fed to start raising interest rates in March, according to trading in federal fund futures. The minutes ceased to provide explicit guidance on the timing of removal after nearly two years of almost zero borrowing costs.
Neil Dutta, head of US economics at Renaissance Macro, took the minutes as a sign that “the Fed is on a slippery slope to a March rate hike.”
“That the Fed is indicating that it might be appropriate to go earlier is that they are giving the go-ahead for a March hike,” Dutta said. “I expect them to announce the start-up before the end of the year.”
Fed Chairman Jerome Powell said in a press conference after the December meeting that recent inflation data had informed the changes. U.S. consumer prices rose 6.8% in the 12 months to November, according to Department of Labor figures, marking the fastest rate of rise in nearly four decades.
At the time of the mid-December meeting – before the omicron variant rose more widely in the US – Fed officials generally saw that the tension was contributing to inflation risks, according to the minutes.
Rising housing costs and rents, more widespread wage growth and more prolonged bottlenecks in the global supply, “which could be exacerbated by the rise of the Omicron variant,” fueled changes in officials’ inflation outlook, the minutes read.
Since the meeting, omicron has spread rapidly across the country, disrupting airline travel and schools, while also posing challenges to restaurants and other businesses.
Fed officials received an information session from staff members on issues related to the normalization of the central bank’s balance sheet of $ 8.8 trillion. During the last rate hike cycle in the 2010s, the Fed waited almost two years after the lifting to start cutting assets.
This time, “participants judged that the appropriate timing of balance sheet expiration would likely be closer to that of the policy rate hike than in the committee’s previous experience,” the minutes read.
In addition, “some participants judged that a significant amount of balance sheet shrinkage may be appropriate over the normalization process.”
The minutes indicate “rapid and furious normalization” compared to the last round of balance sheet declines, said Omair Sharif, founder and president of Inflation Insights.
There are still about four million fewer Americans working than before the pandemic began. The unemployment rate fell to 4.2% in November, well below the peak of 14.8% in April 2020, but still above the 3.5% rate that prevailed in February that year.
A report by the Department of Labor on employment released in December is expected to show that employers added about 425,000 people to payrolls, while the unemployment rate fell to a new pandemic low of 4.1%, according to median estimates of economist.
“Recognizing that the maximum level of employment can develop in line with price stability over time, many participants have seen the US economy make rapid progress toward the committee’s maximum employment target,” the minutes read. “Several participants viewed the labor market conditions as already largely in line with maximum employment.”
(Updates with economists’ remarks beginning in the third paragraph under subheading.)
– With the assistance of Steve Matthews and Molly Smith.