U.S. Federal Reserve officials said a strengthening economy and higher inflation could lead to earlier and faster interest-rate increases than previously expected, news that roiled American stock markets yesterday (January 5).
Minutes from the most recent Fed policy meeting also showed that some policy makers favor starting to shrink the central bank’s balance sheet and ending the stimulus that it had been providing to the U.S. economy.
“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 December 14-15 meeting of the U.S. central bank’s policy-setting Federal Open Market Committee.
The S&P 500 stock index extended declines following release of the minutes, falling 1.9% at the close, the biggest loss since November.
Yields on 10-year Treasuries rose as high as 1.7087%, a level last seen in April, and overnight swaps markets moved to price in an 80% chance of a 25 basis-point interest rate hike at the Fed’s meeting this March.
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 its bond purchases in March.
The minutes stopped short of providing explicit guidance on the timing of liftoff following almost two years of near-zero borrowing costs Stateside.
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.
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.
