In view of the surge in inflation, the US Federal Reserve is considering a possibly faster rate hike. As emerges from the minutes of the latest Fed meeting in December published on Wednesday, the monetary authorities also referred to a very tight labor market. According to the minutes, central bank members noted that it might be justified to raise interest rates earlier or at a faster pace than previously expected. From the point of view of some participants, it could also make sense to start shrinking the central bank balance sheet relatively soon after the start of interest rate hikes. Due to the extensive bond purchases, the Fed's balance sheet was recently swollen to around $ 8.8 trillion.

The minutes put a strain on the stock markets. The Dow Jones lost 1.1 percent to 36,407 points. The yield on ten-year US Treasuries rose at times to 1.691 percent from 1.666 percent on Tuesday. In the meantime, the Fed-Watch-Tool of the stock exchange operator CME estimates the probability at over 70 percent that the Fed will start to raise the key interest rate as early as March.

At their meeting on December 14th and 15th, the dollar watchdogs decided to quickly turn away from crisis mode in view of the soaring inflation. At the same time, they signaled an average of three interest rate hikes upwards for 2022. The key monetary policy rate could then be in a range of 0.75 to 1.0 percent at the end of the current year. It is currently in the range from zero to 0.25 percent. When it comes to scaling back its security purchases to support the economy, the Fed also wants to push the pace - from mid-January the rate of reduction is to be doubled to 30 billion dollars per month.

The tone of the minutes suggests that the central bank will start tightening its monetary policy more quickly and possibly strengthen this course, commented Kim Rupert, an analyst with Action Economics. “They are very concerned that inflation is getting out of control.” In addition, the central bank balance sheet was discussed in more detail at the meeting than she expected. The market will thus be in the mood for possibly four interest rate hikes this year. Dave Donabedian, chief investment strategist at CIBC Private Wealth, made a similar statement. The Fed minutes have made it clear that there will be more than three rate hikes and one downsizing of the balance sheet in 2022, he commented. David Carter, chief investment strategist at Lenox Wealth Advisors said, “There are signs thatthat the Fed is very concerned about inflation could quickly lead to the view that the Fed will aggressively tighten the reins in 2022. "

Inflation at its highest level since 1982

The rate of inflation in the US climbed to 6.8 percent in November.

That is the highest value since June 1982. Delivery problems resulting from the pandemic crisis, material bottlenecks and almost exploding energy costs drove up inflation.

When it comes to inflation, the Federal Reserve pays particular attention to consumer spending.

Food and energy costs are not taken into account.

This annual inflation rate (PCE core rate) was 4.7 percent in November.

That's still more than double the Fed's target of two percent.

The minutes also show that the monetary authorities consider the situation on the labor market to be very tense. Reference was made to almost record high numbers of layoffs and vacancies as well as an increase in wages. Many dollar watchmen at the meeting argued that full employment would be achieved quickly if developments persist. At the time of the December interest rate meeting, however, corona infections also began to increase in the USA due to the spread of the omicron variant. The minutes said that, according to many meeting participants, Omikron had made the economic outlook less certain. Several central bankers noted, however, that Omikron did not fundamentally change the economic recovery path.

Federal Reserve Chairman Jerome Powell will be heard by the Senate Banking Committee next week on his nomination for a second term at the helm of the Fed.

He should also be asked about his assessment of the US economy.