Fed officials said that a strong economy and rising inflation may cause interest rates to rise earlier and faster than previously expected, and some policymakers are also inclined to start shrinking their balance sheets soon.
According to the meeting minutes released on Wednesday, “participants generally pointed out that, given their personal outlook on the economy, labor market, and inflation, it may be necessary to raise the federal funds rate faster or faster than participants had previously expected.” Central Bank of the United States The policy-making Federal Open Market Committee met on December 14-15, when it shifted to a more aggressive anti-inflation stance.
The minutes of the meeting stated: “Some participants also pointed out that it may be appropriate to start reducing the size of the Fed’s balance sheet relatively soon after starting to increase the federal funds rate.”
The Standard & Poor’s 500 Index continued to fall after its release, and is expected to hit its biggest decline in more than a month. The national debt also expanded its decline, while the U.S. dollar narrowed its decline.
At the end of the December meeting, the Federal Open Market Committee announced that it would end the Federal Reserve’s bond purchase program at a faster rate than first proposed at the last meeting in early November, citing rising inflation risks. The new timetable makes the central bank expected to complete the purchase in March.
Interest rate forecast
According to anonymous forecasts released after the meeting, Fed officials also unanimously expect them to start raising interest rates this year. This marked a shift from the previous round of forecasts in September, which indicated that the FOMC was divided on this issue at the time.
According to federal funds futures trading, investors expect the Fed to start raising interest rates in March. After the cost of borrowing in the past two years was close to zero, the minutes of the meeting did not provide clear guidance on the time of flight.
Neil Dutta, head of US economics at Renaissance Macro, viewed the minutes of the meeting as a signal that “the Fed is on a declining path to a March rate hike.”
Duta said: “The Fed’s signal may be more suitable for an early rate hike, and this is what they approve of a March rate hike.” “I hope they can announce the final before the end of the year.”
Federal Reserve Chairman Jerome Powell said at a press conference after the December meeting that recent inflation data reflects these changes. Data from the US Department of Labor shows that in the 12 months ending in November, US consumer prices rose by 6.8%, the fastest growth rate in the past four years.
The minutes of the meeting showed that during the mid-December meeting—before the omicron variant soared more widely in the United States—Fed officials generally believed that this pressure increased the risk of inflation.
The minutes of the meeting stated that rising housing costs and rents, wider wage growth, and longer-term global supply bottlenecks, “this may be exacerbated by the emergence of Omicron variants”, and promote changes in the official inflation outlook.
Since the conference, omicron has spread rapidly across the country, disrupting air travel and schools, and also posing challenges for restaurants and other businesses.
Fed officials listened to staff briefings on issues related to the normalization of the Fed’s US$8.8 trillion balance sheet. In the last interest rate hike cycle in the 2010s, the Fed waited for nearly two years after raising interest rates before starting to cut assets.
The minutes of the meeting stated that this time, “the participants judged that, compared with the committee’s previous experience, the appropriate timing of the balance sheet runoff may be closer to the timing of the rise in policy interest rates.”
In addition, “some participants believe that it may be appropriate to shrink the balance sheet significantly during the normalization process.”
Omair Sharif, founder and president of Inflation Insights, said that compared with the previous round of balance sheet runoff, the minutes of the meeting showed “rapid and intense normalization.”
Compared with before the pandemic began, there are still about 4 million fewer Americans working. The unemployment rate fell to 4.2% in November, well below the peak of 14.8% in April 2020, but still higher than the 3.5% in February of that year.
According to the median estimate of economists, the December Employment Report to be released by the Department of Labor on Friday is expected to show that employers have increased employment by approximately 425,000 people, while the unemployment rate has dropped to a pandemic low of 4.1%.
The minutes of the meeting stated: “Recognizing that the highest employment level consistent with price stability may change over time, many participants see that the US economy is moving rapidly toward the highest employment goal of the Commission.” “Some participants believe that the labor market The situation has largely been consistent with maximizing employment.”
(The economist’s comments are updated starting from the third paragraph below the subtitle.)
– With the help of Steve Matthews and Molly Smith.