Fed eyeing potential for faster rate increases to ease inflation


They agreed that “if inflation does not move down as they expect, it would be appropriate for the committee to remove policy accommodation at a faster pace than they currently anticipate,” said the minutes of the Jan. 25-26 meeting, which were released Wednesday.

When the Fed raised interest rates between 2015 and 2018, it did so gradually—and never more than once every quarter. Under the economic outlook they judged most likely last month, most officials last month “suggested that a faster pace of increases…than in the post-2015 period would likely be warranted,” the minutes said.

The discussion indicated officials were prepared to raise interest rates at consecutive policy meetings, which occur roughly every six weeks, something they haven’t done since 2006. That could set up a series of rate increases in March, May and June.

“This is going to be a year in which we move steadily away from the very highly accommodative monetary policy that we put in place to deal with the economic effects of the pandemic,” Fed Chairman Jerome Powell said at a news conference after the meeting last month.

The minutes also showed officials continued their deliberations over how aggressively to shrink their $9 trillion asset portfolio, but provided few new clues about how that might happen later this year. The move is another way for the Fed to tighten financial conditions to cool the economy.

Fed officials last month agreed to phase out their pandemic-era bond-buying stimulus program in early March.

The minutes indicated Fed officials were satisfied last month with how financial markets had interpreted their recent signaling around coming rate increases. But the Fed’s debate over how fast to raise rates has intensified because of data released since then.

The Labor Department earlier this month reported surprisingly big job gains in January despite a surge in infections due to the Omicron variant of Covid-19. Last week, the Labor Department reported that inflation rose to another four-decade high in January.

And on Wednesday, the Commerce Department reported that retail sales, a measure of spending at stores, online and in restaurants, rose a seasonally adjusted 3.8% in January from the prior month, the strongest monthly gain since last March.

The discussions still have weeks to play out before the Fed’s next policy meeting, March 15-16. But they could lead some officials to support starting with a larger half-percentage-point increase rather than the standard quarter-percentage-point move. The Fed hasn’t raised rates by a half percentage point since 2000.

Until late last week, Fed officials had largely pushed back against market speculation of a half-point rate rise in March.

But on Monday, St. Louis Fed President James Bullard suggested in an interview on CNBC that a larger increase might be necessary.

The minutes didn’t directly mention such a possibility but noted officials “continued to stress that maintaining flexibility to implement appropriate policy adjustments on the basis of risk-management considerations should be a guiding principle in conducting policy in the current highly uncertain environment.”

Officials must balance whether larger, upfront rate increases would give them greater flexibility to slow rate increases later this year if inflation declines against the potential risks of fueling market expectations for even bigger and potentially more disruptive moves.

A few officials worried that a “major realignment of asset prices could contribute to a future downturn,” the minutes said.

Other officials said the risk of a sudden shift in market sentiment due to changes in the Fed’s outlook “could be mitigated through clear and effective communication of the committee’s assessments of … the appropriate path for monetary policy,” the minutes said.

Exactly how the Fed sequences its next moves will depend on Mr. Powell, who hasn’t spoken publicly since last month’s news conference. It is possible that he will deliver his twice-yearly testimony to Congress in early March, which would allow him to guide expectations heading into officials’ March meeting.

The minutes “aren’t the last word on anything, given the worse-than-expected inflation and wages data released since the meeting,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics.

On Wednesday, interest rate futures markets projected a nearly 80% chance that the Fed would lift interest rates to a range between 1.75% and 2% this year, according to CME Group, which would be equivalent to raising rates by a quarter percentage point at all of its scheduled policy meetings this year.

Officials said at last month’s meeting that inflation was running higher than they expected and was doing so for longer than anticipated. Officials hope inflation declines as supply problems ease and demand shifts from goods, where prices rose sharply last year, to services, where inflation has been less extreme.

But at last month’s meeting they cited numerous risks that could keep inflation uncomfortably high, including due to rising rents and persistent wage growth that triggers a more traditional inflationary cycle. They also pointed to risks that inflation rises because of factors outside of the Fed’s control, such as a Russian invasion of Ukraine that roils energy markets or shipping delays made worse by pandemic-driven lockdowns in Asia.

The Fed’s staff last month projected that inflation, using the central bank’s preferred gauge, would slow to 2.6% this year, down from 5.8% in December, the minutes said. The forecast projected inflation to decline further to 2% next year. At officials meeting in December, the staff had projected inflation to decline to 2.1% this year.

This story has been published from a wire agency feed without modifications to the text

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