Fed Minutes Flag Chance of Past Rises, Balance Sheet

(Bloomberg) – Federal Reserve officials said a strengthening of the economy and higher inflation could lead to earlier and faster rate hikes than previously expected, with some policy makers also preferring to start shrinking the balance sheet soon after.

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“Participants generally noted that given their individual outlook for the economy, labor market and inflation, it may be justified to raise the federal funds rate faster or at a faster pace than participants had previously expected,” according to the minutes published on Wednesday. on 14-15. December in the US Federal Reserve’s policy-making Federal Open Market Committee as it shifted to a more aggressive anti-inflationary stance.

“Some participants also noted that it might be appropriate to start reducing the size of the Federal Reserve’s balance sheet relatively quickly after starting to raise the federal funds rate,” the minutes read.

The S&P 500 stock index continued to decline after its release and was heading for its biggest loss in more than a month. Government bonds also widened losses, and the dollar received its fall.

At the end of the December meeting, the FOMC announced that it would wind up the Fed’s bond buying program at a faster pace than first outlined at the previous meeting in early November, citing rising risks from inflation. The new schedule puts the central bank on track to complete purchases in March.

Rate forecasts

Fed officials were also unanimous in expecting they would have to start raising interest rates this year, according to anonymous projections released after the meeting. It marked a shift from the previous round of forecasts in September, which had shown that the FOMC at that time was evenly distributed on the issue.

Investors expect the Fed to start raising interest rates in March, according to trading in federal funds futures. The minutes ceased to provide explicit guidance on the time of termination 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 an interest rate hike in March.”

“That the Fed is signaling that it might be appropriate to go earlier is that they are giving the green light for a march increase,” Dutta said. “I expect them to announce the drain before the end of the year.”

Fed Chairman Jerome Powell said at a news conference after the December meeting that the latest inflation data informed the changes. U.S. consumer prices rose 6.8% in the 12 months to November, according to Labor Department figures, marking the fastest growth rate in nearly four decades.

At the time of the mid-December meeting – before the omicron variant had risen more widely across the United States – Fed officials generally saw the strain as an addition to inflation risks, according to the minutes.

Omicron Impact

Rising housing costs and rents, more widespread wage growth and more prolonged global bottlenecks, “which could be exacerbated by the advent of the Omicron variant,” fueled changes in officials’ inflation prospects, the report said.

Since the meeting, omicron has spread rapidly across the country, disrupting air travel and schools while providing challenges for restaurants and other businesses.

Fed officials received a briefing 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 starting to start trimming assets.

Read more: Quantitative ‘Tightening’? What does the Fed think ?: QuickTake

This time, the participants assessed that the appropriate time for the balance to expire would probably be closer to the time when the policy is repealed than in the committee’s previous experience, the minutes state.

In addition, some participants assessed that a significant amount of balance loss could be appropriate during the normalization process.

The minutes suggest “rapid and furious normalization” compared to the last round of the balance sheet, 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 3.5%, which was applicable in February of the same year.

A report by the Labor Department on December employment, which expires Friday, is expected to show that employers added about 425,000 people to the payroll, while the unemployment rate fell to a new pandemic low of 4.1%, according to economists’ median estimates.

“Recognizing that the maximum level of employment consistent with price stability may develop over time, so many participants that the US economy made rapid progress toward the Committee’s maximum employment targets,” the minutes read. “Several participants viewed the labor market conditions as already largely in line with maximum employment.”

(Updates with economists’ comments start in the third section under the subheading.)

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