Global markets fluctuate in anticipation of the rising interest rates causing poor performances. But matters may be far worse than anticipated.
Minutes of the Federal Open Market Committee December meeting released on Wednesday shows that the bank is preparing for more aggressive tightening.
They may need to hasten the move for an interest rate hike to rein in inflation and stabilize the economy.
The minutes show that the officials are fully on board with this move.
That is in the case of swiftly scaling back the asset purchase programme, which was instituted at the beginning of the pandemic. It was done to give the flexibility to raise interest rates next year.
It also provides insight into why Fed pivoted sharply in late 2021 when they embraced an aggressive approach in withdrawing its accommodation from the financial markets. It also shows how they could proceed with various policy adjustments.
After the minutes were released, sell-off in US stocks gathered pace. The S&P 500 traded 1.2% lower that day, with Nasdaq Composite going down by 2%.
It also featured the first substantive discussion about the Fed’s balance sheet. Since early 2020, it has doubled its size and is now at $9tn. It also suggests support for them to begin reducing its balance sheet after the first interest rate hike.
The dot-plot of individual interest rate projections published in December by the Fed shows that the interest rates would rise three times next year, with three more in 2023 and two more in 2024.
In September, they were split on the idea of policy rate hike.
According to Christopher Waller, a governor at the Federal Reserve suggested that the first hike could come as early as March when the pandemic stimulus program ends.
It also stated that policymakers stressed the point of staying flexible when it comes to policy adjustments in the future.
According to their outlook on the inflation and the unemployment rate, it was necessary to increase the rates sooner or faster.
The inflation has gone beyond the expectation of the Fed. The latest prints show the developing danger that raised US consumer prices could be settled.
The chair of the Federal Reserve confessed that they had no idea that the inflation would reach the current levels when they declared that they would tolerate higher inflation.
Personal Consumption Expenditures price index (PCEPI) recorded a 5.7% annual pace in November, the highest in four decades. This made them raise their inflation forecasts accordingly and lowered the targets for the unemployment rate.
They are committed to keeping interest rates near zero till it reaches an inflation level of 2% with maximum employment. At the same time, some members suggested raising the inflation rate before the employment target is achieved to control inflation.