The Economy

Fed Minutes Show Heightened Inflation Concerns

"It may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated.”
Matthew HellerJanuary 6, 2022

U.S. Federal Reserve officials may be leaning toward speeding up the timetable for hiking interest rates after concluding that inflationary pressures have exceeded their expectations.

According to the minutes of their December meeting, members of the Federal Open Market Committee noted that “inflation readings had been higher and were more persistent and widespread than previously anticipated.”

While participants “generally continued to anticipate that inflation would decline significantly over the course of 2022 as supply constraints eased, almost all stated that they had revised up their forecasts of inflation for 2022 notably, and many did so for 2023 as well,” the minutes said.

As a result, “it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated.”

The Fed had previously projected at least three quarter-percentage-point rate increases next year after keeping rates at zero since the pandemic began in March 2020. But the minutes prompted Julia Coronado, founder of economic-advisory firm MacroPolicy Perspectives, to move up her forecast for increases to begin in March, instead of June.

“The Fed is on a glide path to hiking in March,” Neil Dutta, an economist at research firm Renaissance Macro, told The Wall Street Journal. “It is hard to see what is going to hold them back.”

As The New York Times reports, inflation has been alarmingly high for much longer than central bankers expected, with the Fed’s preferred inflation gauge rising 4.7% in November from a year earlier, well above its 2% target.

Fed officials have already responded to the surge in inflation by reducing the monthly pace of the central bank’s massive bond-buying program by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities. That pace would mean ending the program by March.

“The whole point of accelerating the tapering [of the bond program] was … so the March meeting could be a live meeting” to raise rates, Fed governor Christopher Waller said last month.

At their December meeting, Fed officials attributed their revised inflation forecasts to rising housing costs and rents, more widespread wage growth driven by labor shortages, and more prolonged global supply-side frictions.