The minutes from the March 15-16, 2022 Federal Open Market Committee (FOMC) meeting showed that the Fed is poised to take action to quell the continued acceleration in inflation.
On the progression of economy, the Committee noted that “indicators of economic activity and employment had continued to strengthen. Job gains had been strong in recent months, and the unemployment rate had declined substantially. Inflation remained elevated, reflecting continued supply and demand imbalances, higher energy prices, and broader price pressures.”
On the current acceleration in prices, members of the Committee stated that “recent inflation readings continued to significantly exceed the Committee’s longer-run goal and noted that developments associated with Russia’s invasion of Ukraine, including the related surge in energy prices, will add to near-term inflation pressures.”
On Russia’s invasion of Ukraine, the committee stated that “the implications of the war for the U.S. economy were highly uncertain, but in the near term, the invasion and related events were likely to create significant additional upward pressure on inflation and could weigh on economic activity.”
On the future pace of policy tightening, they stated that “one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified.” Moreover, the Committee indicated that they will begin to reduce the size of their balance sheet at a faster pace than was experienced in 2017-2019. The consensus amongst the Committee is that a plan to reduce Treasury securities by $60 billion per month and agency MBS by $35 billion per month would likely be appropriate.
Key Implications
The minutes revealed inflation remains the priority for the Fed, with consumer prices having rocketed to 7.9% from year-ago levels. The Russia-Ukraine conflict and recent COVID lockdowns in China, only add to the upside risk. Additionally, the labor market has continued to gain traction, with the unemployment rate falling to 3.6%, just 0.1 percentage points above its pre-pandemic levels. We expect a series of rate hikes in the coming months as the Committee tries to reign in inflationary pressures.
In addition to interest rate increases, the Committee appears ready to reduce the size of its balance sheet. The economic recovery has been swifter than in previous cycles and it is expected that the pace of tightening will be more aggressive. This will undoubtedly play through to yields, which have increased sharply since the beginning of the year on expectations of tighter monetary conditions.
