Fed’s December meeting reveals possible earlier, faster interest rate hikes

There were also discussions about reducing the balance sheet after raising the federal funds rate

The newly released minutes from the Federal Reserve's December meeting showed the Fed is considering raising rates sooner than previously expected.  (iStock)

The Federal Reserve released the minutes from its December meeting on Wednesday, which revealed the possibility of earlier and faster rate hikes as inflation continues to soar.

After the meeting, the Fed announced it was doubling its taper rate and considering up to three rate increases in 2022. Now, the recently released minutes showed that members of the Federal Open Market Committee (FOMC) discussed the possibility of raising rates sooner than originally planned. 

"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," the minutes stated. "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."

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Inflation continues to surge

The Central Bank focused its attention on "surprisingly high inflation," according to the minutes, noting that it has surpassed their previous expectations. 

"Participants remarked that inflation readings had been higher and were more persistent and widespread than previously anticipated," the minutes stated. "Some participants noted that trimmed mean measures of inflation had reached decade-high levels and that the percentage of product categories with substantial price increases continued to climb. 

"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 continued.

Inflation hit a 39-year high in November as the Consumer Price Index (CPI) rose 6.8% annually, according to the Bureau of Labor Statistics (BLS). As inflation increases, the Fed could begin to shift its monetary policy and move up its anticipated rate hikes, increasing the federal funds rate in 2022 sooner than expected.

"They noted that current conditions included a stronger economic outlook, higher inflation, and a larger balance sheet and thus could warrant a potentially faster pace of policy rate normalization," the minutes stated.

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Fed considers three rate hikes in 2022

Traders have indicated that the possibility of a rate hike at the Fed's March meeting increased to 57.6% in the first week of January, according to the CME Group's FedWatch Tool. This comes as Fed officials during the December FOMC meeting began considering the possibility of up to three rate hikes this year and sped up the tapering of its asset purchases as inflation increases and the labor market improves.

"Acknowledging that the maximum level of employment consistent with price stability may evolve over time, many participants saw the U.S. economy making rapid progress toward the Committee’s maximum-employment goal," the minutes stated. "Several participants viewed labor market conditions as already largely consistent with maximum employment."

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