Fed eyes potential for faster rate increases to ease inflation

The US central bank last month discussed a faster timetable for raising interest rates starting in March, amid greater discomfort with high inflation.

Cars drive past the Marriner S. Eccles Federal Reserve building in Washington, DC. Picture: Stefani Reynolds / AFP

Federal Reserve officials at their meeting last month discussed an accelerated timetable for raising their benchmark interest rate beginning with an anticipated increase in March, amid greater discomfort with high inflation.

They agreed that “if inflation does not move down as they expect, it would be appropriate for the committee to remove policy accommodation at a faster pace than they currently anticipate,” said the minutes of the Jan. 25-26 meeting, which were released Wednesday.

When the Fed raised interest rates between 2015 and 2018, it did so gradually — and never more than once every quarter.

“Most participants suggested 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,” the minutes said.

The discussion indicated officials were more comfortable with raising interest rates at consecutive policy meetings, which occur roughly every six weeks, something they haven’t done since 2006. That could set up a series of rate increases in March, May and June.

“This is going to be a year in which we move steadily away from the very highly accommodative monetary policy that we put in place to deal with the economic effects of the pandemic,” Fed Chairman Jerome Powell said at a news conference after the meeting last month.

Minutes of the Jan. 25-26 meeting also showed officials continued their deliberations over how aggressively to shrink their $US9 trillion asset portfolio, but provided few new clues about how that might happen later this year. The move is another way for the Fed to tighten financial conditions to cool the economy.

The minutes indicated Fed officials were satisfied last month with how financial markets had interpreted their recent signalling around upcoming rate moves.

But a strong inflation report last week is likely to intensify their debate over how to speed up rate rises. The discussions still have weeks to play out but could lead some officials to support starting with a larger half-percentage-point increase rather than the standard quarter-percentage-point move. The Fed hasn’t raised rates by a half percentage point since 2000.

Exactly how the Fed sequences its next moves will depend on Mr. Powell, who hasn’t spoken publicly since last month’s news conference.

Before the release of the minutes Wednesday afternoon, interest rate futures markets projected a nearly 80 per cent chance that the Fed would lift interest rates to a range between 1.75 per cent and 2 per cent this year, according to CME Group, which would be equivalent to raising rates by a quarter percentage point at all of its scheduled policy meetings this year.

Until late last week, Fed officials had largely pushed back against market speculation of a half-point rate rise in March.

But on Monday, St. Louis Fed President James Bullard suggested in an interview on CNBC that a larger increase might be necessary.

Officials must balance whether larger, upfront rate increases would give them greater flexibility to slow rate increases later this year if inflation declines against the potential risks of fuelling market expectations for even bigger and potentially more disruptive moves.
The Wall Street Journal