The minutes showed that both considerations weighed on policymakers in their future actions, but as the labor market recovered rapidly, they began to focus their attention firmly on the risk of excessive inflation. The Fed has two main roles: promoting maximum employment and keeping prices relatively stable.
“Several participants noted that they already saw labor market conditions largely in line with maximum employment,” the minutes read. At the same time, some officials noted that even if the labor market did not fully recover, if inflation showed signs of a spiraling out of control, it might be wise to hike rates.
“It underscores that they are definitely swiveling strongly in the direction of rate hikes,” said Michael Feroli, US chief economist at JP Morgan, after the release. Although it is difficult to pinpoint the timing, “they are moving towards putting politics in a more restrictive environment”.
There is a reason for the Fed’s active stance. Inflation has been alarmingly high for much longer than central bankers expected. Last year, policymakers expected prices to rise temporarily as pandemic-hit sectors such as airlines and restaurants rebounded and then returned to normal.
Instead, in the year through November, prices rose the most since 1982, and monthly increases remained brisk. Factory closures and tangled shipping lines have made it difficult for suppliers to catch up with booming consumer demand for goods, which is driving up costs. The price gains have also started to spread: rents are rising faster, which could keep the high inflation.
Frequently asked questions about inflation
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What is inflation Inflation is a loss of purchasing power over time, which means your dollar won’t go as far tomorrow as it is today. It is usually expressed as the annual change in the price of goods and services for everyday use such as groceries, furniture, clothing, transportation costs and toys.
What causes inflation? This can be the result of increasing consumer demand. However, inflation can also rise and fall due to developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is Inflation Bad? It depends on the circumstances. Rapid price hikes mean trouble, but moderate price hikes could also lead to higher wages and employment growth.
Can inflation affect the stock market? Rapid inflation usually means trouble for stocks. Financial assets in general have performed poorly during past inflation booms, while tangible assets such as houses have held up better.
Inflation is widely expected to ease this spring as prices are measured at relatively high levels from last year. Prices could also slow as producers catch up with demand, officials hope. But policymakers lack certainty about when this will happen.
Officials in their December economic estimates projected inflation to fall to 2.6 percent by the end of 2022, but estimates ranged from 2 to 3.2 percent. To put those numbers in context, the Fed’s preferred price index rose 5.7 percent through November, and the central bank is targeting an average of 2 percent annual gains over time.