The Federal Reserve may need to quickly raise rates, shrink balance sheets quickly – World Affairs SRS

The Federal Reserve may need to quickly raise rates, shrink balance sheets quickly

– World Affairs SRS

Federal Reserve officials said last month that the US labor market was “too tight” and that the US central bank may need to not only raise interest rates sooner than expected, but also reduce its net asset holdings to overcome high inflation. May also need to be reduced, according to the minutes of their December 14-15 policy meeting.

“Participants generally noted … it may be necessary to raise the federal funds rate sooner or faster than participants had previously anticipated. Some participants also noted that the Federal Reserve’s balance sheet may have a higher rate of interest. It may be appropriate to start reducing the size of the federal funds rate immediately after the start of raising it,” Minutes said.

Minutes released on Wednesday offered more details on the Fed’s change last month and pointed to a more stringent monetary policy. Policymakers agreed to end their pandemic-era program of bond purchases, and issued forecasts of three quarter-percentage-point rate increases through 2022.

The minutes showed the Fed debating not only the initial rate hike, but also whether to use a second lever to contain inflation by allowing a decline in US Treasury bonds and mortgage-backed securities.

The December meeting was held as the number of coronavirus cases began to rise due to the spread of the Omicron version.

The infection has spread since then, and there is no comment yet from senior Fed officials on whether the changing health situation has changed their views about proper monetary policy.

Fed Chairman Jerome Powell will appear before the Senate Banking Committee next week to hear his nomination for a second four-year term as head of the central bank, and is likely to update his views on the economy at that time.

(Only the title and image of this report may have been reworked by Business Standard staff; the rest of the content is generated automatically from a syndicated feed.)

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