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Fed sees rate hikes ‘sooner’ as inflation spikes

Fed sees rate hikes ‘sooner’ as inflation spikes

Fed sees rate hikes ‘sooner’ as inflation spikes

Image: AFP

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WASHINGTON: Federal Reserve officials last month were concerned about the Omicron impact, but believed the US economy had recovered enough from the pandemic downturn that interest rate hikes could come sooner than expected, according to minutes of the December meeting released Wednesday.

The document provides a behind-the-scenes look at the deliberations of the Fed’s policy committee, which convened as the US central bank faced increasing pressure to act against the wave of inflation that sent consumer prices surging to multi-decade highs.

The Federal Open Market Committee (FOMC) accelerated the withdrawal of the pandemic stimulus measures and released forecasts showing central bankers expect to hike interest rates, their most potent weapon against price increases, as many as three times in 2022.

One of the two criteria for raising the benchmark lending rate off zero is how close the economy is to maximum employment, and many officials believe it is nearing that point or already there.

That means “it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” the minutes said.

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With the faster pullback, the Fed’s stimulus bond-buying program now is set to end in March, setting the stage for rate hikes after that, though the minutes acknowledge they could move even quicker, if necessary given rising prices.

“Participants generally continued to anticipate that inflation would decline significantly over the course of 2022” but “almost all” forecast higher inflation this year, and many in 2023.

Meeting participants also believed the supply chain snarls that have helped fuel the price increases will “persist well into (2022) at least,” according to the minutes.

The FOMC gathered as the Omicron variant was spreading across the United States, but before the surge in new cases seen in recent days.

Officials were split over how much of a threat the new strain posed to the world’s largest economy, with “many” believing it “made the economic outlook more uncertain.”

Several said “they did not yet see the new variant as fundamentally altering the path of economic recovery,” according to the minutes.

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