Fed officials have discussed an ever-faster rate hike in 2022.

Federal Reserve officials have suggested they may withdraw support for the economy faster than policymakers had previously anticipated, as...


Federal Reserve officials have suggested they may withdraw support for the economy faster than policymakers had previously anticipated, as the minutes of their December meeting showed, as a moment of inflation uncomfortably high forces them to reorient their policy.

Central bankers planned last month that they would hike interest rates three times in 2022 as the economy recovered and inflation remained above the Fed’s target. Economists and investors believe those increases could start as early as March, when the Fed is now expected to complete the large-scale bond buying program it has used in tandem with low rates to fuel the economy.

Fed officials have pointed to a stronger outlook for economic growth and the labor market as well as continued inflation, saying “it may become warranted to raise the federal funds rate sooner or at a lower rate. faster pace than participants had anticipated, “according to the minutes. , who were out wednesday.

Officials could then take steps to further cool the economy by shrinking the size of their balance sheet – where the bonds they bought are held. This could help drive up long-term interest rates, making borrowing for many types of purchases more expensive and further weakening demand.

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

The markets reacted quickly to the news. Major stock indexes, which were down slightly on Wednesday, fell sharply after the Fed released the document at 2 p.m. The S&P 500 fell 1.9%, its biggest drop in weeks.

Government bond yields, an indicator of investors’ expectations for interest rates, have jumped. The yield on 10-year Treasuries climbed to 1.71%, its highest since April.

The Fed’s large asset purchases had added juice to the economy and markets with each passing month, so cutting them will provide less momentum. Rising interest rates could do even more to slow growth: By making borrowing costs for homes, cars and credit cards higher, higher rates are expected to slow spending, weigh on the economy. investment and possibly curb hiring and lower prices.

The Fed faces tradeoffs as it considers the way forward. Higher interest rates could weaken a job market that still pulls people off the sidelines after the pandemic lockdowns of 2020. But if the Fed waits too long or acts too slowly, businesses and consumers could start to adjust their behavior to the very high inflation that weighed on the economy for much of last year. This could make it harder to contain price hikes – forcing more drastic rate hikes, or even potentially causing a recession, down the road.

The minutes showed that both considerations weighed heavily on the minds of policymakers when considering their future actions, but as the labor market quickly recovered, they began to turn their attention decisively to the threat of too high inflation. The Fed is charged with two main tasks, fostering as many jobs as possible and keeping prices relatively stable.

“Several participants noted that they viewed labor market conditions as already broadly compatible with maximum employment,” the minutes said. At the same time, some officials have noted that it might make sense to raise rates even if the labor market is not fully recovered if inflation shows signs of spilling over.

“This confirms that they are definitely heading towards rate hikes,” Michael Feroli, chief US economist at JP Morgan, said after the publication. Although it is difficult to determine the moment, he said, “they are moving towards a more restrictive policy”.

There is a reason for the Fed’s active stance. Inflation has been at alarming levels for much longer than central bankers anticipated. Last year, policymakers expected prices to rise temporarily as sectors affected by the pandemic like airlines and restaurants recover and then return to normal.

Instead, prices through November rose the most since 1982, and monthly gains remained strong. Factory closures and tangled shipping lines have made it difficult for suppliers to catch up with burgeoning consumer demand for goods, forcing costs to rise. The price gains have also started to spread: Rents are increasing faster, which could make high inflation more persistent.

Inflation is broadly expected to subside this spring, as prices are measured against relatively high levels a year earlier. Prices could also slow as producers catch up with demand, officials hope. But policymakers are uncertain about when this will happen.

The officials projected in their December economic estimates that inflation will decline to 2.6% by the end of 2022, but estimates ranged from 2% to 3.2%. To put these numbers in context, the Fed preferential price index climbed 5.7% through November, and the central bank is targeting annual gains of 2% on average over time.

Explaining their forecast for longer lasting high inflation, “Participants pointed to rising costs of housing and rents, more widespread wage growth driven by labor shortages and more prolonged global frictions on the labor side. supply, which could be exacerbated by the emergence of the Omicron variant, ”the Minute said.

The authorities have quickly adjusted their policy in recent months as inflation has sparked unease. They announced that they would slow down bond buying, then quickly doubled the pace of that process. They have gone from signaling that they may or may not raise interest rates in 2022 to making it clear that they plan to do so.

The question is, what comes next: Will the central bank have to accelerate its plans to withdraw more stimulus? Or will inflation subside on its own enough that an aggressive central bank response is unnecessary?

Investors will also be watching closely the impact of the Fed’s actions on the prices of stocks and other assets, which tend to benefit from bond purchases and low rates. There are a saying that the Fed’s job is to remove the punch bowl when the party starts – and that’s what it is about to do.

Markets “have grown used to not just a punch bowl, but a spiked punch bowl,” said Nela Richardson, chief economist at ADP.

The new variant of the coronavirus, which could also slow hiring and growth, is also looming in the outlook.

“Many participants noted that the emergence of the Omicron variant has made the economic outlook more uncertain,” the minutes said.

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Newsrust - US Top News: Fed officials have discussed an ever-faster rate hike in 2022.
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