Fed may update its stance on inflation, balance sheet

Fed may update its stance on inflation, balance sheet

The Federal Reserve's minutes of its last policy meeting are likely to shed light on the U.S. central bank's plans to trim its balance sheet and hike interest rates in 2022 as well as update its shifting view of inflation after the release of the minutes of its last policy meeting on Wednesday.

The document is due at 2 p.m. EST 1900 GMT and will provide an accounting of the Jan. 25 -- 26 meeting, in which policymakers agreed that it would soon be appropriate to raise the Fed's overnight interest rate from its near zero level, and also discuss the future of nearly $9 trillion in securities held by the central bank.

Debate around topics and the range of views on the severity of the ongoing inflation surge and other economic risks may hint at how aggressive the Fed is in tightening monetary policy, and in particular how likely it will be to start a round of rate hikes in March with a half-percentage increase in its target rate.

The investors are hoping that the Fed will take that step instead of sticking with the more cautious quarter-percentage increase it typically prefers.

Citi analyst Andrew Hollenhorst noted that Fed Chair Jerome Powell, in his post-meeting news conference last month, declined to take the potential for a 50 basis point hike at some point off the table. If the minutes reflect this all-options on-the- table policy approach, that may be read as consistent with the larger and faster set of rate increases currently anticipated by investors, Hollenhorst wrote.

Since the beginning of this year, investors have steadily increased how much they expect the Fed to raise rates, and they are currently anticipating that it will increase the target rate by between 1.50 and 2.00 percentage points by the end of the year, the equivalent of a quarter-percentage increase at each of its remaining seven policy meetings in 2022.

The minutes are backward-looking, but they are likely to show how policymakers are thinking about the economy's evolution and how sensitive they are to incoming data.

Since then, reports have heightened the sense of inflation risk. The economy seemed to be unaware of the impact of a winter surge of coronaviruses. In January, the U.S. employers added 467,000 jobs, which is more than expected, and wages grew. The most recent inflation data showed no signs of easing from the current 40 year high.

The minutes may provide more details about the talks, which Powell said will likely be completed over the course of the policy meetings in March and May, as the policymakers discussed plans to trim the Fed's asset holdings in the coming months.

The Fed issued a set of broad principles for reducing its holdings of U.S. Treasuries and mortgage-backed securities last month. The specifics of how much reduction is allowed each month, and when to start the runoff, must be pin down by policymakers.