The Federal Reserve may have to raise interest rates “sooner or at a faster pace” than officials initially expected, as it seeks to curb uncomfortably high inflation and promote a stable economic recovery, according to minutes of its most recent meeting.
Minutes of the December meeting of the Federal Open Market Committee released on Wednesday showed that officials are fully on board with plans to speed up the asset purchase program introduced at the start of the pandemic, around the central bank give greater flexibility to increase interest rates. rates next year.
The minutes provide additional details on why the Fed turned sharp at the end of 2021 to adopt a more aggressive approach to withdrawing its stay from financial markets and how the central bank can proceed with various policy adjustments this year.
U.S. stock sales accelerated after the minutes were released, with the S&P 500 down more than 1 percent on the day and the tech-heavy Nasdaq Composite down 3 percent. Short-term U.S. government bonds also sold, with the two-year yield at 0.83 percent, the highest level since March 2020.
December’s meeting also included the first substantive discussion on the Fed’s balance sheet, which has more than doubled in size since early 2020 and is now moving at just under $ 9tn.
The minutes indicate broad support for the Fed to start reducing its balance sheet after the first interest rate hike. Some said a move could happen “relatively soon” thereafter.
“Some participants felt that a less accommodating future policy stance was likely to be justified and that the committee should convey a strong commitment to address increased inflationary pressures,” the minutes read.
According to the so-called dot plot of individual interest rate projections published by the Fed after its December meeting, officials expect to raise interest rates three times next year, with three more moves for 2023 and two more in 2024.
In September, Fed officials were evenly divided over the prospect of raising the policy rate this year from today’s near-zero level.
Christopher Waller, a governor at the central bank, later suggested the first rate hike may even come as early as March, as the stimulus program stops altogether.
According to the minutes, policymakers stressed the importance of staying flexible when it comes to future policy adjustments, especially given the speed of economic recovery.
“Participants generally noted that, given their individual outlook for the economy, the labor market and inflation, it may be justified to raise the federal fund rate sooner or at a faster rate than participants previously expected,” the minutes read. .
Inflation came in much stronger than Fed officials initially expected in the early days of the pandemic recovery. Recent prints have suggested a growing risk of hedging increased consumer prices.
The minutes highlight specific concerns that the supply chain bottlenecks and labor shortages that have contributed to rising prices are likely to “last longer and be more widespread than initially thought”.
At the press conference after the December meeting, Jay Powell, the Fed chairman, said that the inflation level was “not at all” what the Fed was looking for when it announced in August 2020 that it would tolerate higher inflation to make up for previous periods. of undershot of its protracted 2 percent target.
One of its favorite meters, the price index for personal consumption expenditure, recorded an annual rate of 5.7 percent in November, the highest level in about four decades.
Fed officials have raised their inflation forecasts accordingly, with the key measure – which eliminates volatile items such as food and energy – now expected to be steady at 4.4 percent in 2021 before falling further to 2.7 percent by the end of 2022. FOMC members and other regional branch presidents also lowered their targets for the unemployment rate, which stands at 4.2 percent. By the end of 2022, it is expected to drop to 3.5 percent.
The central bank has committed itself to keeping interest rates close to zero until it reaches inflation which is on average 2 per cent over time and maximum employment.
The first threshold is “more than achieved”, the minutes read, with “several” participants seeing that labor market conditions were already “largely in line” with the second goal.
Some participants have even suggested that the Fed may raise rates before maximum employment is fully reached, especially as inflationary pressures continue to increase.
Market-implied chance for a March interest rate hike rose on Wednesday as investors devoured the faltering tilt.
However, one concern that officials noticed when discussing their plans to reduce accommodation was the resilience of the treasury market, with “several” participants noticing “vulnerabilities” that could limit how quickly the Fed could shrink its balance sheet.