The minutes from the December 14-15, 2021 Federal Open Market Committee (FOMC) meeting showed that members are feeling the push to end pandemic-induced support.
On the overall economic outlook, members felt more confident in the recovery, highlighting continued strength in the labor market. The members noted “a number of signs that the U.S. labor market was very tight, including near-record rates of quits and job vacancies, as well as a notable pickup in wage growth.”
On the persistence of high inflation caused by supply-side factors, FOMC members “noted that supply chain bottlenecks and labor shortages continued to limit businesses’ ability to meet strong demand. They judged that these challenges would likely last longer and be more widespread than previously thought. Participants generally expected global supply chain bottlenecks to persist well into next year at least.”
During the December meeting, FOMC members voted to speed up the taper of the Fed’s Quantitative Easing (QE) program. In the minutes, they stated that the “ongoing pace of net asset purchases was no longer necessary…[given]…elevated inflation pressures and the strengthening labor market”.
Key Implications
It is clear that the U.S. economy no longer needs emergency levels of monetary policy support. Economic output continues to accelerate and the labor market is heating up. This economic strength alone should maintain inflation at elevated levels. Layer on the disruption to global supply chains caused by the Omicron variant and we have the necessary ingredients to further stoke inflation. This is why the Fed announced that it will hasten the taper of its QE program. It is also why the members have significantly pulled forward the start of rate hikes this year.
Treasury yields have continued to rise since the Fed’s December meeting. The 2-year yield is now at 0.82% (up 22 basis points) and the 10-year yield is at 1.70% (up nearly 35 basis points from the December low). At the same time, equity markets continue to surge higher, with the Dow and S&P 500 riding the Santa Claus rally to new all-time highs. The threat of tighter financial conditions caused by higher policy rates clearly isn’t enough to dent investor optimism on risk assets.
