Fed Minutes Flag Probability of Earlier Rise, Balance Sheet Decline

Fed Minutes Flag Probability of Earlier Rise, Balance Sheet Decline

Federal Reserve authorities said a reinforcing economy and higher inflation could prompt prior and quicker interest-rate increments than recently expected, with a few approach producers additionally leaning toward beginning to contract the balance sheet before long. The S&P 500 stock list broadened decreases following the delivery, falling 1.9% at the nearby, the greatest misfortune since November. Yields on 10-year Treasuries rose to as high as 1.7087%, a level last found in April, and short-term trades markets moved to cost in a 80% chance of a 25 premise point climb at the Fed’s meeting in March.

“Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate,” the minutes said.

“Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” according to minutes published Wednesday of the Dec. 14-15 meeting of the U.S. central bank’s policy-setting Federal Open Market Committee, when it pivoted to a more aggressive inflation-fighting stance.

At the conclusion of the December meeting, the FOMC announced it would wind down 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 conclude purchases in March.

— Anna Wong, chief U.S. economist

“The minutes showed the FOMC is coalescing around the view the economy is ready for a broad-based removal of monetary accommodation, and the omicron variant is unlikely to slow it down. We think the risk of rate liftoff at the March meeting has increased substantially, and will be watching closely Fedspeak ahead of the January meeting for further indications.”

Fed officials were also unanimous in expecting they would need to begin raising rates this year, according to anonymous projections published after the meeting. That marked a shift from the previous round of forecasts in September, which had shown the FOMC at the time was evenly divided on the question.

The minutes stopped short of providing explicit guidance on the timing of liftoff following almost two years of near-zero borrowing costs.

Neil Dutta, head of U.S. economics at Renaissance Macro, took the minutes as a sign that “the Fed is on a glide path to a March rate hike.” “That the Fed is signaling it might be appropriate to go sooner is them giving the go-ahead for a March hike,” Dutta said. “I expect them to announce the run-off before year end.”

Fed Chair Jerome Powell, in a press conference following the December meeting, said recent inflation data informed the changes. U.S. consumer prices rose 6.8% in the 12 months through November, according to Labor Department figures, marking the fastest pace of increase in nearly four decades. At the time of the meeting in mid-December — before the omicron variant had surged more widely throughout the U.S. — Fed officials generally saw the strain as adding to inflation risks, according to the minutes.

Omicron Impact Rising housing costs and rents, more widespread wage growth and more prolonged global supply bottlenecks, “which could be exacerbated by the emergence of the Omicron variant,” fueled changes to officials’ inflation outlooks, the minutes said.

This time around, “participants judged that the appropriate timing of balance sheet runoff would likely be closer to that of policy rate liftoff than in the committee’s previous experience,” the minutes said. In addition, “some participants judged that a significant amount of balance sheet shrinkage could be appropriate over the normalization process.”

Fed officials received a briefing from staff members on issues related to normalization of the central bank’s $8.8 trillion balance sheet. During the last rate-hike cycle in the 2010s, the Fed waited almost two years after liftoff to begin trimming assets. Since the meeting, omicron has spread rapidly throughout the country, disrupting airline travel and schools while also presenting challenges to restaurants and other businesses.

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