Officials at the Federal Reserve expressed concern about inflation at their meeting in January, in particular that it had spread beyond pandemic-affected sectors into other areas, and agreed it would be warranted to begin scaling back their support for the economy faster than they previously had anticipated, minutes of the meeting released Wednesday showed.
Fed officials noted that the labor market remained strong, though the Omicron wave of the coronavirus had worsened supply chain bottlenecks and labor shortages, and that inflation continued to significantly exceed the levels the central bank targets.
Most officials still expect inflation to moderate over the year as pandemic-related supply bottlenecks ease and the Fed removes some of its support for the economy. But some participants warned that inflation could continue to accelerate, pointing to factors like rising wages and rents. If inflation does not move down as they expect, most Fed officials agreed that they might need to pare back their support for the economy even more quickly, though that could carry some risk.
The outlook for inflation could be worsened by China’s zero-tolerance policy toward Covid, which has led to expansive lockdowns that have shuttered factories; a clash in Ukraine that could push up global energy prices; or the spread of another variant, they said.
The central bank emphasized that the pace of interest rate increases would hinge on how the economy developed. But most officials agreed that the Fed should take a faster approach to cooling the economy than it did in 2015, when it began raising rates at a slow and plodding pace in the wake of the Great Recession.
“Most participants suggested that a faster pace of increases in the target range for the federal funds rate than in the post-2015 period would likely be warranted, should the economy evolve generally in line with the committee’s expectation,” the minutes read.
Fed officials also agreed that it was appropriate to proceed with plans to trim the nearly $9 trillion in securities that the central bank holds. Most officials preferred to keep to a schedule announced in December, which would end such purchases starting next month, though some viewed an earlier end to the program as warranted and a way to signal that they were taking a stronger stance to fight inflation.
Policymakers said the labor market had made “remarkable progress in recovering from the recession associated with the pandemic and, by most measures, was now very strong.”
The January meeting solidified what markets had been anticipating: that the Fed was on track to raise interest rates in March. The question now is how quickly, and by how much. Many investors have speculated that the Fed could raise its interest rate by half a percentage point in March, instead of its usual quarter-point increase.
In a statement after their two-day policy meeting in January, Fed officials laid the groundwork for higher borrowing costs “soon.” Jerome H. Powell, the Fed chair, said at a news conference after the meeting that “I would say that the committee is of a mind to raise the federal funds rate at the March meeting, assuming that the conditions are appropriate for doing so.”
Inflation has continued to run hot since the Fed’s last meeting, and wage growth remains elevated. A key inflation measure released last week showed that prices were climbing at the fastest pace in 40 years and broadening beyond pandemic-affected goods and services, a sign that rapid gains could prove longer lasting and harder to shake off.
January’s Consumer Price Index showed prices jumping 7.5 percent over the year and 0.6 percent from the prior month, exceeding forecasts. A separate inflation gauge that the Fed prefers also showed that prices remained elevated at the end of 2021. Overall, prices have been climbing at the fastest pace since 1982.
Wall Street is now anticipating that interest rates could rise to more than 1.75 percent by the end of the year, up from near zero now. Markets began to bet on a double-size rate increase after January’s inflation data came in surprisingly strong. But some Fed officials have been tempering those expectations, saying they need to take a steady approach.
Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said on Sunday that the Fed needed to get moving but that its approach ought to be “measured.”
“I see that it is obvious that we need to pull some of the accommodation out of the economy,” Ms. Daly said on “Face the Nation.” “But history tells us with Fed policy that abrupt and aggressive action can actually have a destabilizing effect on the very growth and price stability we’re trying to achieve.”