Federal Reserve Building in Washington, US, January 26, 2022. REUTERS/Joshua Roberts/File Photo
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WASHINGTON (Reuters) – Federal Reserve officials agreed last month that with inflation tightening its grip on the economy and hiring strength, it was time to raise interest rates, but that any decisions would depend on meeting by meeting. Analysis of inflation and other data, according to the minutes of the January 25-26 policy meeting.
The calculation of the two-day session showed that the US central bank is preparing to fight the fastest pace of rate increases since the 1980s, with officials saying that while they still expect inflation to fall during the year, they will be ready to raise interest rates quickly. If not.
“Most participants noted that if inflation does not move down as they expect, it would be appropriate for the (FOMC) committee to remove policy accommodation at a faster pace than they currently expect,” the minutes stated.
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As it stands, Fed officials said the strength of the economy and the current high pace of inflation will warrant a faster rate hike than the one-quarter pace seen during the tightening cycle that began in 2015 — a statement some analysts said may signal higher prices. At every meeting this year.
The Federal Reserve meets eight times a year, or roughly every six to seven weeks.
But, with the US nearing its peak in coronavirus infections when the last policy meeting took place, the minutes offered no clear indication that policymakers are tied to a particular trajectory—particularly because they don’t feel they will start firing on borrowing costs at their next meeting in March with Half a percentage point rise in the benchmark overnight interest rate.
The Fed has in recent years been sticking with smaller and usually well-expected quarter-percentage point increments.
Of the Fed officials who have made public comments about monetary policy since the January meeting, most favored a smaller initial increase, including two who spoke on Wednesday.
The minutes stated that despite their surprise at the persistence of inflation, “the participants affirmed that the appropriate course of policy will depend on economic and financial developments and their implications for expectations and risks surrounding the expectations.”
Federal Reserve officials will “update their assessments to prepare appropriately for the policy situation at each meeting.”
Bond yields fell and stocks moved higher on the scale after the minutes were released. The yield on the two-year Treasury, the maturity generally more sensitive to Fed rate expectations, fell to 1.52% from 1.55% and the S&P 500 (.SPX) It rose to positive territory on the day.
Balance Sheet Discussion
After the January policy meeting, Federal Reserve officials issued a statement saying that it would “be appropriate soon” to raise the central bank’s key rate from near zero.
Data since the beginning of this year, if any, has increased the Fed’s willingness to act. US retail sales in January were strong, and US employers added 467,000 jobs that month, much more than expected. The latest inflation data showed no sign of retreating from a 40-year high.
But policymakers haven’t stuck much beyond the idea that they will raise interest rates at the policy meeting scheduled for March 15-16, and will likely continue to raise rates through the year – depending on how inflation responds.
Investors have started pricing in the hope that the Fed will raise its target rate by half a percentage point next month, but now they see a quarter point rise as more likely.
“While the minutes of the FOMC meeting in late January predate the release of stronger-than-expected labor market and inflation data covering the past month, officials do not appear to be seriously considering a 50 basis point rate hike to start tightening,” said Paul Ashworth, Senior North American economists at Capital Economics:
The Fed in January also issued a broad set of guidelines on how it plans to cut nearly $9 trillion from the central bank’s portfolio of securities.
The balance sheet discussion included a discussion of whether or not a direct sale of securities is needed, the minutes said. Although no decision was made, the minutes noted that “several” of the meeting participants said sales may be necessary at some point in the future.
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(Covering) Howard Schneider Editing by Paul Simao
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