January meeting reading shows Fed unsuited to particular rate hike pace

The Federal Reserve Building in Washington, U.S., January 26, 2022. REUTERS/Joshua Roberts/File Photo

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WASHINGTON, Feb 16 (Reuters) – Federal Reserve officials agreed last month that with inflation tightening its grip on the economy and strong employment, it was time to raise interest rates , but also that any decision would depend on a meeting by meeting. analysis of inflation and other data, according to the minutes of the political meeting of January 25 and 26.

Minutes from the two-day session showed that the US central bank was preparing to battle the fastest pace of price increases since the 1980s, with officials saying that while they still expected as inflation declines throughout the year, they would be prepared to raise rates quickly. if that doesn’t.

“Most participants noted that if inflation does not come down as they expect, it would be appropriate for the (Federal Open Market) Committee to remove policy accommodation at a faster pace than they expect. currently provide for it,” the minutes read.

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As things stand, Fed officials said the strong economy and the current high pace of inflation would warrant a rate increase faster than the once-per-quarter pace seen in the tightening cycle that began in 2015 – a statement some analysts say may point to rate hikes at every meeting this year.

The Fed meets eight times a year, or about every six to seven weeks.

But, with the United States still near a peak in coronavirus infections at the last policy meeting, the minutes gave no obvious indication that policymakers were wedded to any particular path — and, crucially, , no sense that they would begin the borrowing cost take-off at their next meeting in March with a half-percentage-point hike in the overnight interest rate.

In recent years, the Fed has stuck to smaller and generally well-anticipated quarter-percentage-point increases.

Of Fed officials who have made public comments on monetary policy since the January meeting, most favored a lower initial increase, including two who spoke on Wednesday.

Although surprised by the persistence of inflation, “participants emphasized that the appropriate policy path would depend on economic and financial developments and their implications for the outlook and risks around the outlook,” the report said. minutes.

Fed officials will “update their assessments of the appropriate framework for policy guidance at each meeting.”

Bond yields fell and stocks rose after the minutes were released. The yield on the 2-year Treasury, the maturity typically most sensitive to Fed interest rate expectations, slipped to 1.52% vs. 1.55% and the S&P 500 Index (.SPX) moved into positive territory that day.


Following January’s policy meeting, Fed officials released a statement saying it would be “soon appropriate” to raise the central bank’s benchmark overnight interest rate from where it was. close to zero.

The data since the beginning of this year has, on the contrary, reinforced the Fed’s will to act. U.S. retail sales in January were strong, and U.S. employers added 467,000 jobs that month, far more than expected. The most recent inflation data showed no signs of easing from the current 40-year high.

But policymakers didn’t commit much beyond the idea that they will raise rates at their March 15-16 policy meeting and will likely continue to raise rates throughout the year – according to the reaction of inflation.

Investors had started pricing in the expectation that the Fed would raise its interest rate target by half a percentage point next month, but now see a quarter-percentage-point hike 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 spanning the past month, officials did not appear to be seriously considering a rise in inflation. 50 basis points to start the cycle tightening or a hike at each of the seven remaining policy meetings this year,” said Paul Ashworth, chief North American economist at Capital Economics.

The Fed also issued a broad set of guidelines in January on how it plans to reduce the portfolio of nearly $9 trillion of securities held by the central bank.

The balance sheet discussion included a debate about whether or not outright securities sales were necessary, the minutes said. While no decision was made, the minutes noted that “many” attendees at the meeting said sales might be needed at some point in the future.

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Reporting by Howard Schneider Editing by Paul Simao

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