The minutes from the January 25-26, 2022 Federal Open Market Committee (FOMC) meeting showed increasing confidence in economic momentum and growing worries over high inflation among participants.
The members of the Committee stated that “indicators of economic activity and employment had continued to strengthen. The sectors most adversely affected by the pandemic had improved in recent months but continued to be affected by the recent sharp rise in COVID-19 cases. Job gains had been solid in recent months, and the unemployment rate had declined substantially.”
On price pressures, they stated that “inflation readings had continued to significantly exceed the Committee’s longer-run goal and elevated inflation was persisting longer than they had anticipated, reflecting supply and demand imbalances related to the pandemic and the reopening of the economy.”
On the forthcoming tightening of policy, they stated that “a faster pace of increases in the target range for the federal funds rate than in the post-2015 period would likely be warranted” given the strength of the current economic backdrop.
Key Implications
There is no longer a question of whether the Fed will hike rates, but by how much. With consumer prices surging to 7.5% and the unemployment rate at 4.0%, the Fed is behind the curve. It needs to catch up, which will hopefully cool some of the inflationary froth.
The minutes revealed that Fed members are planning an aggressive hiking cycle, which will start on March 16th. It looks like a string of rate hikes in successive meetings is in order, which will cause significant upward pressure on short-term interest rates over 2022. This has already been showing up in Treasury yields, where the U.S. 2-year has risen by over 1% in the last three months. Expect this to continue as the Fed executes on rate hikes over the coming months.
