When it finally came on Monday, the announcement from US President Joseph Biden that he was going to nominate Jerome Powell to a second term as Chair of the Federal Reserve, it was anticlimactic; quickly overshadowed not only by the Thanksgiving holiday, but by news of a new coronavirus variant and fears of renewed lockdowns.
Investors are no longer counting on further tightening by the Fed when policymakers meet in mid-December, and expectations of interest rate hikes coming in mid-2022 have receded, at least temporarily.
Atlanta Fed chief Raphael Bostic, however, played down the impact of the Omicron variant, saying on Fox News that once it becomes clear whether the variant is weaker or stronger, the economy—and the Fed—will react accordingly.
At present, he is still expecting one or two rate hikes in 2022 to combat inflation. Bostic, who is in favor of accelerating the Fed’s reduction in asset purchases, is a voting member of the Federal Open Market Committee this year, but will rotate out next year.
FOMC Minutes: Faster Tightening On Hotter Inflation
The minutes of the early November FOMC meeting, released last week, said policymakers expressed willingness to tighten monetary policy faster if inflation continued to run hot.
“Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise 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.”
The personal consumption expenditures index, the inflation measure most closely watched by the Fed, showed a rise of 5% on the year and 4.1% excluding volatile food and energy prices. This rise in the core index was the biggest year-on-year increase since January 1991.
A “couple of participants” worried that medium-term market indicators of inflation expectations showed signs of becoming less anchored, but “several other participants” said this sensitivity was no better or worse than usual and longer-term indicators remained “well anchored.”
The minutes showed policymakers' views on how transitory inflation would be see-sawed back and forth. "Many participants” pointed to indications of more persistent inflation, while others said that “although inflationary pressures were lasting longer than anticipated, those pressures continued to reflect the same pandemic-related imbalances and would likely abate when supply constraints eased.”
Moreover, several of the FOMC policymakers were more hawkish than Powell had indicated in his press conference at the time—when he was still playing down inflation fears pending Biden’s decision on Fed leadership.
Even San Francisco Fed chief Mary Daly, considered a leading dove, said last week she could support a faster pace in tapering bond purchases in view of positive jobs numbers and “eye-popping” inflation. After the November meeting, Powell said the Fed would reduce its current monthly purchases of $120 billion in bonds by $15 billion–$10 billion of Treasuries and $5 billion of mortgage-backed securities.
How much those hawkish views will change with the Omicron variant remains to be seen. Powell and Treasury Secretary Janet Yellen will testify in Congress on Tuesday regarding COVID responses, so investors may get a better idea of how they see things now.
Also out this week will be the Fed’s Beige Book, which has consistently provided anecdotal evidence of inflationary pressures in the economy. The ADP national employment report and the monthly jobs report come later in the week, as economists expect the Bureau of Labor Statistics report on Friday to show a gain of 525,000 in nonfarm payrolls and a headline jobless rate down 0.1 percentage points to 4.5%.