NEW YORK: United States Federal Reserve (Fed) officials are preparing to move faster than their previous round of tightening to keep a high-inflation and a near-full-employment economy from overheating, leaving behind the gradualism that marked the central bank’s approach in the prior decade.

       Prospects for another year of growth above the economy’s speed limit with inflation already high – along with a larger balance sheet that’s suppressing longer-term interest rates – “could warrant a potentially faster pace of policy rate normalisation,” minutes from the Dec 14-15 Federal Open Market Committee (FOMC) meeting said.

       Officials also saw the timing of reducing the US$8.8 trillion (RM36.98 trillion) balance sheet as likely “closer to that of policy-rate liftoff than in the committee’s previous experience,” according to the minutes.

       The details of the Fed’s pivot toward more aggressively fighting inflation marked a step toward greater urgency and agility – and toward smashing market perceptions that the central bank is losing its grip on surging prices.

       The 5.7% annual increase in the Fed’s preferred inflation gauge in November overshot officials’ 2% target for the ninth consecutive month, toppling their earlier predictions that prices would moderate as supply-chain issues resolved.

       Meanwhile, data Friday is forecast to show the jobless rate fell in December to a new pandemic low of 4.1% – a figure near what Fed officials viewed as consistent with maximum employment.

       “They are fighting a different battle on this exit,” said Priya Misra, global head of rates strategy at TD Securities in New York. “They are telling us why: It is inflation and it is also that we are closer to full employment.”

       Financial markets interpreted the minutes as unequivocally hawkish. The S&P 500 stock index slumped 1.9% at the close, the biggest drop in more than a month, while yields on 10-year Treasuries rose as high as 1.71%, the loftiest level since April. Traders raised bets on a rate hike as soon as March to around an 80% probability.

       “The minutes showed the FOMC is coalescing around the view the economy is ready for a broad-based removal of monetary accommodation, and the Omicron variant is unlikely to slow it down.

       “We think the risk of rate liftoff at the March meeting has increased substantially, and will be watching closely Fedspeak ahead of the January meeting for further indications,” Bloomberg economist Anna Wong said.

       While US central bankers haven’t yet endorsed those expectations, chair Jerome Powell and other officials are set to address the outlook over the next week, ahead of their Jan 25-26 meeting where they could signal the likelihood of a March move.

       Policy makers have yet to give detailed remarks on how they viewed the impact from surging Covid-19 infections related to the Omicron variant.

       Over the past two decades, Fed tightening cycles have been gradual and predictable starting with the stair-step “measured” pace increases of the 2000s.

       After the financial crisis, the Fed got off to a slow start as slumping international economies and too-low inflation – combined with an agonising, jobless recovery – warranted caution.

       By 2018, however, the central bank was on steady, four-hikes-per-year pace.

       “We are used to this highly telegraphed, quarter-point, very predictable” rate cycle, said Vincent Reinhart, a former head of the Fed’s division of monetary affairs. “Now we have an element of catching up, so they want to be seen as nimble.”

       In practice, he said, that means potentially signalling that one rate hike could soon be followed by another at the subsequent meeting, without fully committing to it, said Reinhart, now the chief economist at Dreyfus and Mellon.

       At the December meeting, Fed officials were anticipating two quarter-point hikes in 2022, according to the median in the central bank’s “dot plot.”

       A formula developed by Bloomberg Economics, however, “strongly suggests that the anticipated path of the funds rate is more likely to be revised up than down,” former Fed economist David Wilcox, director of US economic research at Bloomberg, wrote in a note.

       The meeting showed Fed officials received a briefing from staff members on issues related to normalisation of the central bank’s balance sheet following trillions of dollars of bond-buying. During the last rate-hike cycle in the 2010s, the Fed waited almost two years after liftoff to begin trimming assets.

       This time around, “participants judged that the appropriate timing of balance sheet runoff would likely be closer to that of policy rate liftoff than in the committee’s previous experience,” the minutes said. — Bloomberg