Minutes of the US Federal Reserve’s December policy meeting were released last week. It outlines the central bank’s plans to speed up measures to keep inflation in check. The US markets fell heavily following the developments as investors are concerned about the aggressive stance of the Fed. The Indian markets declined by up to ~1.5% on Thursday. In this article, find out what the Fed Minutes imply.

The Fed Minutes

The Federal Open Market Committee (FOMC) Meeting Minutes are a detailed record of the committee’s policy-setting meeting held nearly two weeks earlier. It offers detailed insights regarding the FOMC’s stance on monetary policy. The US Fed uses tools to control the overall supply of money in the economy and promote sustainable growth. One can examine the Fed minutes for clues regarding the outcome of future interest rate decisions. 

  • In a document released last Wednesday (Jan 5), the minutes from the policy meeting held on December 14-15 showed that Fed officials are concerned about the pace of increase in prices of goods and services (inflation) and global supply disruptions right from the beginning of the Covid-19 pandemic into the year 2022. These concerns seemed to outweigh the risks posed by the highly transmissible Omicron variant of Covid-19. 
  • The Fed Reserve had so far maintained a consistent stance on its monetary policy. It did not make any major changes in the repo rate or taper bond buying from the open market. The minutes offered details on the Federal Reserve’s abrupt policy shift in December, taken to counter inflation running at more than twice the central bank’s target of 2%. Any central bank would lower interest rates or sell bonds/taper bond buying in the open market whenever the actual inflation rate is higher than the targeted or projected inflation rate. Inflation is currently at a four-decade high in the US, and unemployment has declined to nearly pre-pandemic levels.
  • Federal Reserve officials said a strengthening economy and higher inflation could lead to earlier and faster interest-rate hikes than previously anticipated. This move essentially takes out money from the economy, restricting consumers from spending.
  • The FOMC announced it would wind down the Fed’s bond-buying program at a faster pace than first outlined at a previous meeting in early November to counter risks from inflation. This process is known as tapering. Thus, the Fed is on course to eliminate its emergency quantitative easing program (which essentially pumps money into the economy) a few months earlier than expected. 
  • The FOMC has voted for certain measures to curb inflation rates. Unlike the last meeting, the FOMC has taken steeper measures. It has announced a series of measures that hint towards interest rate hikes starting mid-March. This means that the Fed might take a decision that might hit the markets harder than usual.

What Next?

US Fed Chair Jerome Powell will appear before the Senate Banking Committee next week for a hearing on his nomination for a second four-year term. He is likely to update his views about the US economy at that time. As per industry experts, the achievement of the Fed’s goals in 2022 would ultimately depend on how the nation reacts to the surge in Covid-19 cases and how quickly life goes back to normal. Investment banking firm Goldman Sachs expects up to four Fed interest rate hikes this year.

We will have to wait and watch how the situation unfolds in the weeks to come.