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Hawkish says the Fed may have to raise rates faster to curb inflation

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WASHINGTON () – Federal Reserve officials said last month that the U.S. labor market is “very tight” and that the U.S. Federal Reserve should raise interest rates faster than expected and begin cutting its total assets to ease high inflation. at their political meeting on December 14-15.

FILE PHOTO: The Federal Reserve Board building on Constitution Avenue is pictured in Washington, DC, March 27, 2019. / Brendan McDermid / File photo

“Participants typically noted that given the individual’s outlook for the economy, labor market, and inflation, an increase in the federal funding rate could be guaranteed faster or faster than participants expected. Some participants also noted that the federal funding rate noted that it may be advisable to start reducing the size of the Federal Reserve balance relatively soon after the start of the increase, ”the statement said on Wednesday.

The language showed the depth of the consensus that has emerged in recent weeks on the need for the Fed to tackle high inflation – not only by raising borrowing costs, but also by second-hand action and the central bank’s treasury bonds and mortgages. by reducing. -secured securities accumulated to maintain long-term interest rates during a coronavirus pandemic.

The Fed has about $ 8.8 trillion in its balance sheet.

Markets quickly took notice.

As observed by the CME Group’s FedWatch tool, the probability that the Fed will raise interest rates in March for the first time since the pandemic began has exceeded 70%.

It also led to the prospect of a reduction in the Fed’s participation in long-term bond markets, leading to the largest weekly growth in U.S. 10-year Treasury yields in a year.

U.S. stocks fell to their lowest level since the results of last month’s meeting were announced, perhaps showing more confidence than Fed policymakers expected investors to fight inflation. The yield on the 2-year Treasury note, the most sensitive to Fed policy expectations, rose to its highest level since early March 2020, and since then the economic crisis caused by the pandemic has only just escalated.

“It’s news,” he said. It’s worse than expected, “said David Carter, chief investment officer at Lenox Wealth Advisors in New York.

MAXIMUM EMPLOYMENT

The statements elaborated on the sharp changes in the Fed’s policy in the fight against inflation last month, which rose more than twice the central bank’s rate of 2 percent.

In addition to inflation concerns, officials said the economy is at a maximum, given retirement and other job losses, even if the U.S. labor market is short of more than 3 million jobs before the pre-pandemic peak. said it was closing quickly to what could be considered employment. the labor market caused by the health crisis.

“Participants pointed to a number of signs that the U.S. labor market is very tight, including layoffs and vacancies close to record levels, as well as significant increases in wage growth,” the statement said. in the protocol. “Many participants concluded that if the current pace of improvement continues, labor markets will quickly approach maximum employment.”

Although the views were in mid-December, before the current sharp rise in COVID-19 infections, officials said the spread of the Omicron variant at that time would at least “radically pave the way for economic recovery. They have made it clear that they have not changed. In the United States. “

In December, policymakers agreed to speed up the end of the pandemic bond-buying program and announced forecasts that they expect the rate to triple by a quarter of a percentage point by 2022. The Fed’s overnight interest rate is now close to zero.

The meeting in December came as the incidence of coronavirus infections began to rise due to the spread of the Omicron variant.

Since then, infections have spread and there is no explanation as to whether a change in the health of senior Fed officials has changed their views on appropriate monetary policy.

Fed Chairman Jerome Powell will appear before the Senate Banking Committee next week to hear his candidacy for a second four-year term as central bank governor, at which point he could update his views on the economy.

Howard Schneider’s report Stephen Kalp and Jamie McGiever’s additional report edited by Paul Simao

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