Tuesday, January 18, 2022

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

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WASHINGTON () – A “very tight” labor market and persistent inflation could require the Federal Reserve to raise interest rates faster than expected and start reducing its total assets as a second brake on the economy, U.S. Federal Reserve policymakers said at a recent meeting. month

FILE PHOTO: Federal Reserve Chairman Jerome Powell testifies at a hearing on September 28, 2021, at the Hart Senate Office of the Senate Committee on Banking, Housing and Urban Affairs, Washington, DC. Photo by Kevin Ditsch / Money / File

In a document released on Wednesday, the markets turned out to be resolutely ruthless, with the December 14-15 political meeting minutes Fed officials promising to keep up with global supply problems until 2022, along with rising prices. showed that they were equally concerned about the speed.

These concerns, at least in mid-December, could even be seen by some Fed officials as contributing to inflationary pressures, but seen as “not going to radically change the course of inflation.” also outweighed the risks associated with the rapidly growing Omicron variant of the coronavirus. Economic recovery in the United States. “

“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 “It may be advisable to start reducing the size of the Federal Reserve balance relatively soon after the start of the increase,” the protocol said.

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. The Fed’s balance sheet is about $ 8.8 trillion, much of which was accumulated during the coronavirus pandemic to keep financial markets stable and long-term interest rates.

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 added that the prospect of reducing the Fed’s participation in long-term bond markets pushed U.S. 10-year Treasury yields to their strongest level since April 2021.

U.S. stocks fell, and the S&P 500 index fell about 1.6% as Fed policymakers at last month’s meeting showed more confidence than investors expected to fight inflation. The yield on the 2-year Treasury note, the period most sensitive to Fed policy expectations, rose to its highest level since March 2020, when the pandemic-induced economic crisis erupted.

“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 detailed the sharp changes in the Fed’s policy last month, which more than doubled the central bank’s 2% rate in the fight against inflation.

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.”

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 interview; Additional report by Stephen Kulp and Jamie McGiver; Edited by Paul Simao

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