WASHINGTON–Newly released minutes from the Federal Reserve’s most recent meeting in December indicate the Fed may move more quickly to raise rates than many have predicted.
The central bank had projected in December that it would raise interest rates three times in 2022 as the economy rebounded and inflation remains above the Fed’s stated 2% annual target. The Fed is now expected to wrap up the large-scale bond buying program in the near future, as well.
In its statement, the Fed said “it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” according to the minutes.
By reducing the size of its balance sheet, where the Fed holds the bonds, it could help to push up longer-term interest rates, which in turn makes borrowing for many types of purchases more expensive and further weaken demand.
“Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate,” the minutes state.
The New York Times noted that in the wake of the release of the minutes, government bond yields, a proxy for investor expectations about interest rates, jumped. The yield on 10-year Treasury notes climbed as high as 1.71%, its highest since April.
Balancing Act
The minutes reveal the Fed is wrestling with balancing the need to get inflation under control without undermining the job market.
“Several participants remarked that they viewed labor market conditions as already largely consistent with maximum employment,” the minutes read. But other Fed officials noted that it might be smart to raise rates even if the job market was not fully recovered if inflation showed signs of jumping out of control.
And then there is another issue that is difficult to predict, the new coronavirus variant, which could also slow hiring and growth.
“Many participants noted that the emergence of the Omicron variant made the economic outlook more uncertain,” the minutes read.