Fed minutes point to possible rate hike in March

Minutes of their December 14-15 meeting, released on Wednesday, showed that officials believed rising inflation and a very tight labor market could call for a lifting of short-term rates “sooner than participants or The speeding was anticipated earlier.”

The minutes said some officials also thought the Fed should begin reducing its $8.76 trillion portfolio of bonds and other assets relatively soon. Investors will see the move as another way for the Fed to tighten financial conditions to cool the economy.

The stock fell sharply after the minutes were released Wednesday afternoon. The blue-chip Dow Jones Industrial Average fell 1.1%, while the tech-heavy Nasdaq Composite Index fell 3.3%.

Meanwhile, government bond yields rose on Wednesday. After the minutes were issued, trading in interest rate futures markets showed a nearly two-thirds chance that the Fed would raise rates in March, according to the CME Group.

Julia Coronado, founder of economic-advisory firm Macropolicy Perspectives, said the minutes prompted her to push her forecast for a rate hike to begin in March instead of June.

“The Fed is on a hiking path in March,” said Neil Dutta, economist at research firm Renaissance Macro. “It’s hard to see what’s holding them back.”

Most central bank officials raised the rate by at least three quarter-percentage-points this year, in projections released after last month’s meeting. In September, almost half of the group’s view rate increases can wait until 2023.

For months, Fed leaders stuck to the idea that higher price pressures in 2021 were primarily due to supply-chain constraints and would subside on their own. But Fed Chairman Jerome Powell indicated little confidence in that forecast before the meeting, and other officials broadly shared his views last month.

“While participants continued to generally predict that inflation would decline significantly during 2022 as supply shortages eased, nearly all said they had revised their inflation forecasts for 2022, notably, And many have done the same for 2023,” Minutes said.

An immediate indication of their concerns can be seen from the plans they approved at that meeting to more quickly scale back or reduce their property purchases. The program is now on track to end in March instead of June.

The Fed wants to end the bond-buying program, a form of economic stimulus, before raising short-term rates to curb inflation. “The whole point of accelerating tapering was … so the March meeting could be a live meeting” to raise rates, Fed Governor Christopher Waller said in remarks on December 17. “That was the intention.”

In its post-meeting statement, officials described its inflation target as marginally meeting its 2% target, with the central bank setting one of two key criteria to justify a rate hike. Is.

The minutes revealed that most executives believe that if recent recruitment progress continues, they will “rapidly” achieve their second goal of achieving labor market conditions commensurate with maximum employment. can.

Several officials said last month that higher inflation pressures could force the Fed to raise rates before the employment target is met, and some officials thought that had already been accomplished, according to the minutes.

The change is the latest sign of how the accelerating and expanding inflationary pressures amid a tight labor market have reshaped executives’ economic outlook and policy planning.

Fed officials’ decision to get their foot off gas more quickly reflects a shifting calculus about the ability of strong demand to push prices up — such as wages and rents — into supply-chain constraints and shortages of cars. Despite the scarcity of items.

Strong demand for goods, disrupted supply chains and various shortages pushed 12-month inflation to its highest level in decades. Core consumer prices, which exclude volatile food and energy categories, were up 4.7% in November from a year earlier, according to the Fed’s preferred gauge. That’s well above both the Fed’s 2% target and officials’ willingness to drive inflation slightly above that target.

“There is a real risk now, I believe, that inflation could be more stable and … the risk of higher inflation is increased,” Mr. Powell said at a news conference on 15 December.

While officials last month cited the Omicron version of the coronavirus as a risk, the minutes suggest officials did not see it as a serious headwind for the economy.

Minutes provided more details about initial discussions officials last month of how and when to shrink its $8.76 trillion portfolio of Treasury and mortgage securities, which doubled in size over the past two years amid efforts to stabilize the economy. happened.

Bond-buying programs stimulate the economy by lowering long-term interest rates, encouraging consumers and businesses to borrow and spend. In theory, doing so should also boost the financial markets by driving investors into stocks, corporate bonds and other assets.

Once the Fed stops buying assets, it can keep holdings stable by reinvesting the proceeds of mature securities into new ones, which should have an economically neutral effect. Alternatively, the Fed could reduce its holdings by allowing bonds to mature or close, which would be a form of policy tightening.

Over the past decade, the Fed held its holdings steady for nearly two years after raising interest rates for the first time before gradually reducing its holdings in 2017. Last month most executives thought they should start reducing their holdings as soon as possible because the economy is strong, inflation is high and the asset portfolio is huge, the minutes said.

Executives also thought it would be appropriate to shrink the asset portfolio faster than at the end of the last decade.

The minutes suggest that shrinking the Fed’s asset portfolio “will be a more prominent feature of the tightening than in the past,” Ms Coronado said.

Fed officials are expected to resume deliberations on their portfolio run-off strategy at their next meeting on January 25-26.

This story has been published without modification to the text from a wire agency feed