Fed minutes paint picture of central bank ready to quickly abandon its ease policy


Federal Reserve officials appeared eager at their December meeting to develop plans to move away from their current accommodative policy stance given that inflation was likely to be higher than expected over the next two years. , according to the minutes of their December meeting released Wednesday.

“Participants generally noted that, given their individual outlook for the economy, labor market, and inflation, it might become warranted to raise the federal funds rate earlier or at a faster rate than that. that the participants had anticipated, “according to the summary.

At the meeting, Fed officials had a broad discussion on how to move policy away from its current easy position by raising rates and also reducing its balance sheet by $ 8.67 trillion.

A minority of officials were eager to start reducing the balance sheet, which is another form of monetary policy tightening.

“Some participants… 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.

After reading the minutes, Katherine Judge, an economist at CIBC Securities, said she believed the Fed would start reducing its balance sheet in the April-June quarter.

It’s much faster than the last cycle. In 2015, the Fed waited two years after the first rate hike to reduce its balance sheet.

Officials said 2015’s cautious approach was not appropriate this year.

“Participants noted that the current economic outlook is much stronger, with higher inflation and a tighter labor market than at the start of the previous episode of normalization,” the minutes said.

Several officials have expressed concern about vulnerabilities in the Treasury market and how this could affect the tightening balance sheet. But other officials noted that the Fed has a new permanent pension facility to support money markets.

The minutes show that “nearly all” Fed officials have revised their inflation forecasts upward this year and “many” have increased their forecasts for 2023. Fed officials and staff predict that the inflation would drop considerably this year. But they stressed that the risks were on the upside.

“Inflation fears dominated the discussion,” said Ian Shepherdson, chief economist at the Hall of Fame.

Officials were also optimistic about the job market. Several officials said they believe the labor market has already met the central bank’s “maximum jobs” target, opening the door to rate hikes.

The Fed’s policy has been remarkably easy since the onset of the coronavirus pandemic in early 2020. Many economists urged the central bank to take a more neutral stance last year, but the central bank has kept its footing on gas – keeping rates close to zero and buying treasury bills and mortgage-backed securities.

Many officials did not see the omicron variant as fundamentally changing the path of economic recovery.

The central bank has now pivoted sharply and, at its December meeting, agreed to end its asset purchases in mid-March. The central bank has forecast three rate hikes this year. The market sees a strong possibility that the first hike could come at the March Fed meeting.

Economists note that a fed funds rate of 2.5% is generally considered the “neutral” fed funds rate that neither stimulates nor slows the economy.

DJIA actions,
-1.07%

SPX,
-1.94%
fell sharply after the Fed minutes were released. The yield of the 10-year Treasury bill TMUBMUSD10Y,
1.727%
rose above 1.7%.


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