EconoFACTS

January 05, 2022 | 15:09

Minutes of Dec. 14-15 FOMC Meeting — Sooner Rate Hike Risk Revealed

Economist

Deputy Chief Economist, Head of U.S. Economics and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

Michael Gregory , CFA

Deputy Chief Economist, Head of U.S. Economics and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

At the December 14-15 FOMC meeting, members voted to quicken the taper pace in order to end asset purchases by mid-March and thus set the stage for potential rate hikes later this year. Meanwhile, the dot plot’s median projection called for three rate hikes this year (compared to only half a hike before) with all participants forecasting at least one action, and another three moves for next year.

Today’s Minutes showed participants “generally” concurred that “given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated.” So clearly, at the time, the net risk rested on the side of a speedier rate hike cadence than what the median projection portrayed.

As noted in Chair Powell’s presser, the discussion about balance sheet normalization began. In comparison to the previous asset shrinking episode, it seems the Fed is comfortable with the process starting sooner relative to both the end of QE and the start of rate hikes along with it transpiring at faster runoff rate. The FOMC has yet to make any decision, but we suspect they will decide early enough to be ready to start runoff by the end of this year.

The Minutes mentioned (as Powell also did) that the Omicron variant “was seen as an important source of downside risk to activity, while the possibility of more severe and persistent supply issues was viewed as an additional downside risk to activity and as an upside risk to inflation.” At the time of the meeting, the weekly average of new daily infections was running around 120,000; it’s now above 540,000 and heading higher. One suspects these risks are now all heightened in the Fed’s judgement, but still likely not sufficient to meaningfully trim the prospects for a trifecta of rate hikes later this year.