The job market in the United States is nearly robust enough that the Fed's low-interest rate policies are no longer required, according to Federal Reserve officials last month.
In minutes from its December meeting, unveiled this week, the Fed worries that inflation is growing in more sectors of the economy and will last longer than they previously anticipated.
Many policy-makers thought the United States economy was making good progress toward the Federal Reserve's objective of maximum employment, according to the minutes. Several people said they thought the objective had already been achieved. The labor market is still four million jobs short of its pre-pandemic peak, but some Fed officials think that all those positions might not be recovered immediately, if at all, as older adults retire and others remain at home to care of children.
The minutes of the meeting also highlighted the Fed's dramatic shift from its prior policy, when it kept interest rates low to stimulate hiring, to rapidly increasing rates to curb inflation, which has reached four-decade highs.
US inflation concerns have also risen recently, with the Federal Reserve's top officials expressing increased worries about price growth and hinting that they may need to accelerate their pace of interest rate increases. After the minutes were published, traders dumped stocks and sent share prices tumbling. The Dow Jones Industrial Average fell almost 400 points at the close of trading as a result of those actions. Bond yields also went up in reaction to that news. The yield on the 10-year Treasury note, a standard for mortgage rates and many other sorts of loans, rose to 1.7% soon after the minutes were published, up from 1.68% beforehand. Minutes stated,
“Inflation readings had been higher and were more persistent and widespread than previously anticipated ... Some participants noted that ... the percentage of product categories with substantial price increases continued to climb.”
Kathy Bostjancic, chief U.S. financial economist at Oxford Economics said, in a research note:
“The minutes ... reflected policymakers’ rising discomfort with elevated inflation and stronger confidence in the recovery of the economy and the labor market despite the downside risks due to the Omicron variant."
Inflation is increasing while unemployment is declining much more quickly than many economists predicted, Fed Chair Jerome Powell said after the Dec. 14-15 meeting, when he added that the bank was speeding up the reduction of its ultra-low interest rate policies.
The Federal Reserve announced last month that it will reduce the amount of bonds it purchases every month, which are meant to lower long-term rates, at twice the rate it previously planned and is almost certainly going to cease those purchases in March. The faster timetable implies that the Fed will probably raise its short-term interest rate as early as this June.
In December, Fed policymakers predicted they might raise the short-term interest rate three times this year. That was a substantial change from their September gathering, when the 18 members were split on whether or not to raise rates just once in 2022.
Despite the fact that Fed officials have focused on keeping rates low to combat unemployment for years, several of them now emphasize concerns about high inflation as a reason for raising interest rates in 2022.
The Federal Reserve's key interest rate, which has been held near zero for almost two years, has a significant impact on consumer and commercial loans, such as mortgages, credit cards, and automobile loans. Rates on these loans may also climb later this year as a result of changes in the Fed's policy, but they do not always immediately affect other borrowing
Since the pandemic began in March 2020, the Federal Reserve has acquired more than $4.5 trillion in Treasurys and mortgage-backed securities, far outstripping its prior accumulation of nearly $8.8 trillion. At this month's meeting, Fed officials addressed when and how quickly they would reduce those bond holdings, another step that might raise interest rates, and opined they could start doing so in 2022, after the first interest rate hike.
That would take considerably less time than the Fed's previous round of bond purchases, known as "quantitative easing," which it implemented in multiple phases following the 2008-2009 Great Recession.
The Federal Reserve didn't begin selling bonds until October 2017, almost two years after it began to raise rates.
However, in December, Federal Reserve officials stated that the economy was "much stronger" than it had been a year ago, with "higher inflation and a tighter labor market."