Some Federal Reserve policymakers were in favor of a faster pace of bond tapering to provide the central bank with plenty of room to hike rates amid concerns about inflation pressures, the minutes of the Fed's November meeting showed on Wednesday.
At the conclusion of its previous meeting on Nov. 3, the Federal Open Market Committee kept its benchmark rate in a range of 0% to 0.25%, and said it would begin scaling back its $120 billion monthly bond purchases by $15 billion each month.
The committee said it would trim its Treasury bond purchases by $10 billion and its mortgage-backed bond purchases by $5 billion, starting this month.
But "some participants suggested that reducing the pace of net asset purchases by more than $15 billion each month could be warranted so that the committee would be in a better position to make adjustments to the target range for the federal funds rate, particularly in light of inflation pressures," the minutes showed.
Expectations for a ramp-up in the speed of the tapering were bolstered recently after Fed Vice Chair Richard Clarida said last week the pace of tapering would be on the agenda at the Dec. 14-15 meeting.
Fed members stressed in the November meeting that the end of tapering – expected in mid-2022 – wouldn’t automatically lead to an immediate start of liftoff in rates as the bar to hike rates was more “stringent.”
"Participants noted that beginning to scale back the pace of net asset purchases was not intended to convey any direct signal regarding adjustments to the target range for the federal funds rate. They highlighted the more stringent criteria for raising the target range, compared with the criteria that applied to beginning to reduce the pace of asset purchases," the minutes showed.
Beyond the pace of tapering, the timeline to Fed rate hikes has also remained front and center, but Fed members appear divided on whether to tighten sooner.
Various participants backed raising "the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the committee's objectives," according to the minutes.
But a number of participants "stressed that a patient attitude toward incoming data remained appropriate to allow for careful evaluation of evolving supply chain developments and their implications for the labor market and inflation."
Traders are currently pricing in a first rate hike as soon as June next year, following by a second rate hike in the November, according to Investing.com’s Fed Rate Monitor Tool.
The aggressive bets come in the wake of above-target inflation that shows little sign of the abating.
The Personal Consumption Expenditures price index, the Fed’s preferred inflation measure, was up 0.6% on October, below the 0.7% rate expected, but ahead of prior’s month 0.4%. That took the annualized rate for October to 5%, well above the Fed’s 2% target.
While many are calling for sooner rather later rate hikes to curb inflation, others warn that rate hikes tend to have a delayed impact on the economy, and could ultimately prove counterproductive to the Fed’s goals.
“Making an abrupt shift on that policy today may create an effect some 12 months 18 months down the road that could occur at a time in which the inflation effects that we know today are quite high, begin to dissipate and maybe dissipate rapidly and therefore could work counter productively toward the Fed achieving its maximum employment policy,” Mark Luschini, the chief investment strategist at Janney Montgomery Scott, told Investing.com in an interview on Tuesday.
