Evelyn Reynolds

New data showing that the unemployment rate is falling and wages are rising is expected to cement — and maybe even hasten — the Federal Reserve’s plan to begin raising interest rates this year as it tries to put a lid on high inflation.The jobless rate fell to 3.9 percent in December, based on data collected during a period that largely predated the worst of the Omicron-driven virus surge.Unemployment peaked at 14.8 percent in April 2020, and had hovered around 3.5 percent for months before the onset of the pandemic. The fact that it is returning so rapidly to near-normal levels has caused many central bankers to determine that the United States is nearing what they estimate to be “full employment,” even though millions of former employees have yet to return to the job market.“This affirms the Fed’s conclusion,” Diane Swonk, chief economist at Grant Thornton, said after the report. “This is a hot labor market.”Signs abound that jobs are plentiful but that workers are hard to find: Job openings are at elevated levels, and the share of people quitting their jobs just touched a record. Employers complain they are struggling to hire, and a shortfall of workers has caused many businesses to curtail hours or services.As a result, employers have begun to pay more to retain their employees and lure in new applicants. Average hourly earnings climbed 4.7 percent in the year through December, faster than economists in a Bloomberg survey had expected and much more quickly than the typical pace of progress before the pandemic, which oscillated around 3 percent.Those quick pay gains are a signal to Fed officials that people who want jobs and are available to work are generally able to find it — that the job market is what economists call “tight” and would-be workers are relatively scarce — and that wages might begin to feed into prices. When companies pay more, they may also charge their customers more to cover their costs.The Status of U.S. JobsMore Workers Quit Than Ever: A record number of Americans — more than 4.5 million people — ​​voluntarily left their jobs in November.Jobs Report: The American economy added 210,000 jobs in November, a slowdown from the prior month.Analysis: The number of new jobs added in November was below expectations, but the report shows that the economy is on the right track.Jobless Claims Plunge: Initial unemployment claims for the week ending Nov. 20 fell to 199,000, their lowest point since 1969.Some Fed officials are worried that rising wages and limited production could help sustain elevated inflation — now at nearly a 40-year high. The combination of a healing job market and the threat that price increases will jump out of control has prompted central bankers to speed up their plans to withdraw policy help from the economy.Fed officials are already slowing the big bond purchases they had been using to support the economy. In addition to that, they could raise rates three times in 2022, based on their estimates, and economists think those increases could begin as soon as March. That would make borrowing for cars, houses and business expansions more expensive, slowing spending, hiring and growth.“It makes sense to get going sooner rather than later,” James Bullard, president of the Federal Reserve Bank of St. Louis, said during a call with reporters on Thursday, suggesting that the moves could come very soon. “I think March would be a definite possibility.”And officials have signaled that once rate increases start, they could promptly begin to shrink their balance sheet — where they hold the bonds they have purchased to stoke growth throughout the pandemic downturn. Doing that would help to lift longer-term interest rates, reinforcing rate increases and helping to further slow lending and spending.Economists speculated after the jobs report that the new figures made an imminent rate increase even more likely, and that the central bank might even be prodded to remove its economic support more quickly as wages take off.“We think that today’s report adds to the case for the Fed to kick off its hiking cycle in March,” researchers at Bank of America wrote. “The economy appears to be operating below maximum employment and inflation remains sticky-high.”Krishna Guha, an economist at Evercore ISI, argued that the combination of rapidly declining unemployment and heady wages might even prompt central bankers to increase interest rates faster than once every three months — the fastest pace in their last set of interest rate increases, which took place from 2015 to 2018.“The Fed might end up having to hike at a pace faster than the baseline one hike per quarter,” Mr. Guha wrote.Fresh data out next week could further intensify that pressure: The Consumer Price Index is expected to surge to 7 percent in the year through December, based on a Bloomberg survey of economists, which would be the fastest pace of increase since June 1982.The White House is doing what it can to promote competition, disentangle supply chains and lower prices at the margin, but controlling inflation falls mainly to the Fed, a fact President Biden underlined at a news conference on Friday.“I’m confident the Federal Reserve will act to achieve their dual goals of full employment and stable prices, and make sure the price increases do not become entrenched over the long term,” Mr. Biden said.Investors will get a chance to hear from key Fed officials themselves next week. Jerome H. Powell, whom Mr. Biden has renominated as Fed chair, has a confirmation hearing on Tuesday before the Senate Banking Committee. Lael Brainard, now a Fed governor and Mr. Biden’s pick to be vice chair, has a hearing on Thursday.Both are likely to emphasize the unevenness of the recovery and acknowledge that millions of workers remain out of the job market thanks to caregiving responsibilities, virus fears and other pandemic barriers, as they have throughout the downturn.They will probably also note that overall hiring slowed in December: Employers added 199,000 jobs, the weakest performance all year, as they struggled to find workers. And Omicron poses a risk of further retrenchment, because the November data came before the recent surge in virus cases that has kept restaurant diners at bay and shut down live performances.But at the end of the day, it is the falling jobless rate that is likely to remain in focus for the Fed as it contemplates its next steps, economists think.“A March rate hike seems pretty likely at this stage,” said Julia Coronado, founder of the research firm MacroPolicy Perspectives. Asked if there was one overarching takeaway from the new data, she said: “It’s just a tightening labor market. That’s it.” More

Another month of slow job gains.Cumulative change in jobs since before the pandemic More

Nonfarm payrolls rose by 199,000 in December, far fewer than the 422,000 estimate.
The unemployment rate dropped to 3.9%, better than the 4.1% estimate.
Wages increased more than expected, rising 4.7% year over year.
Leisure and hospitality showed the biggest gain by industry.

The U.S. economy added far fewer jobs than expected in December just as the nation was grappling with a massive surge in Covid cases, the Labor Department said Friday.
Nonfarm payrolls grew by 199,000, while the unemployment rate fell to 3.9%, according to Bureau of Labor Statistics data. That compared with the Dow Jones estimate of 422,000 for the payrolls number and 4.1% for the unemployment rate.

Stock market futures edged lower after the report, while bond yields were in positive territory though off their highs of the morning. Major indexes turned mixed in early afternoon trading, with the Dow up more than 50 points but tech stocks holding back the Nasdaq and S&P 500.
Job creation was highest in leisure and hospitality, a key recovery sector, which added 53,000. Professional and business services contributed 43,000, while manufacturing added 26,000.
The unemployment rate was a fresh pandemic-era low and near the 50-year low of 3.5% in February 2020. That decline came even though the labor force participation rate was unchanged at 61.9% amid an ongoing labor shortage in the U.S.
A more encompassing measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons slid to 7.3%, down 0.4 percentage point. Though the overall jobless rates fell, unemployment for Blacks spiked during the month, rising to 7.1% from 6.5%. The rate for white women 20 years and older fell sharply, to 3.1% from 3.7%.
“The new year is off to a rocky start,” wrote Nick Bunker, economic research director at job placement site Indeed. “These less than stellar numbers were recorded before the omicron variant started to spread significantly in the United States. Hopefully the current wave of the pandemic will lead to limited labor market damage. The labor market is still recovering, but a more sustainable comeback is only possible in a post-pandemic environment.”

Average hourly earnings rose more than expected as the U.S. sees its fastest inflation pace in nearly 40 years. Wages climbed 0.6% for the month and were up 4.7% year over year. That compares with respective estimates of 0.4% and 4.2%.
While the establishment survey showed much lower-than-expected job gains, the household count told a different story, with a gain of 651,000. There also were upward revisions for prior months, with the final October tally pushed up to 648,000, an increase of 102,000, while November’s disappointing report gained 39,000 in its first revision to 249,000.
The data left the total employment level still 2.9 million shy of where it stood in February 2020, before the pandemic declaration. The labor force participation rate is 1.5 percentage points lower, representing a workforce decline of nearly 2.3 million for the period. There were nearly 4 million more jobs than there were unemployed workers through November.
The numbers “suggest that worker shortages were becoming a bigger restraint on employment growth, even before the Omicron surge in infections, which could knock hundreds of thousands off payrolls in January,” wrote Michael Pearce, senior U.S. economist at Capital Economics.
Other sectors seeing job gains included construction (22,000), transportation and warehousing (19,000), and wholesale trade (14,000).
Job creation for the year totaled 6.45 million, easily the highest aggregate gain on record going back to 1940.
The numbers come at a crossroads for the U.S. economy as more than half a million new Covid cases per day, many related to the omicron variant, threaten to stall an economic recovery that looks to accelerate in 2022.
While growth decelerated through the summer, economists expect that GDP rose sharply at the end of the year, with the Atlanta Fed tracking 6.7% growth. Federal Reserve officials have been watching the data closely.
The central bank has indicated it will begin slowing the help it has been providing the economy since the pandemic began.
Friday’s report covered the week including Dec. 12, which came before the worst of an omicron spike that began heading into Christmas.
The BLS data conflicted strongly with a report earlier in the week from payrolls processing firm ADP, which said private payrolls surged by 807,000. Weekly jobless claims also have been trending near a 52-year low, mostly recently coming in at 207,000 for the week ended Jan. 1.
Economist forecasts have been wildly inaccurate for the payrolls report and revisions have been substantial over the past four months.
In September, November and December, estimates overshot the actual counts by an average of nearly 223,000. For October, the estimate was 198,000 below the final count.
Monthly revisions for 2021 through November added an average 101,000 to the final counts.
— CNBC’s Peter Schacknow and Steve Liesman contributed to this report.
Correction: Manufacturing added 26,000 jobs. An earlier version misstated the figure.

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The leisure and hospitality sector led hiring in December as restaurants added wait staff, cooks and bartenders ahead of the holidays.
The hiring in the hospitality and professional services sectors helped the broader U.S. economy add 199,000 jobs last month.
Manufacturers, which added 26,000 jobs overall, hired 7,700 machinery workers, 4,200 motor vehicle workers and 1,600 furniture employees.

The leisure and hospitality sector led hiring in December as restaurant and bar managers added wait staff, cooks and bartenders to payrolls ahead of the holidays.
That sector saw net job growth of 53,000 workers, with eateries accounting for 42,600 of that gain and hotels, motels and other accommodation businesses adding 10,000. Amusement parks, casinos and other recreational firms shed 6,600 workers in December.

For the year, leisure and hospitality added 2.6 million jobs, but employment itself was off 1.2 million jobs, or 7.2%, since February 2020. Employment in food services is still down by 653,000 since February 2020.
The broad professional and business services sector also proved another bright spot in December as computer programmers, management consultants and building service workers (including janitors, landscapers and chimney sweeps) all saw decent gains. The sector added 43,000 net positions.
The hiring in the hospitality and professional services sectors helped the broader U.S. economy add 199,000 jobs in December, according to the Labor Department data. The unemployment rate fell under 4% for the first time since February 2020 and wages rose 4.7% compared with December 2020.
Still, many economists were perplexed by the headline jobs number given expectations for a gain north of 400,000 jobs.
“Overall, this print had mixed messaging – the payrolls growth number may look disappointing, but the underlying story is lack of availability of labor, which is manifesting itself in faster wage growth,” Anu Gaggar, global investment strategist for Commonwealth Financial Network, said in an email.

Manufacturing and construction both saw decent hiring.
Manufacturers, which added 26,000 jobs overall, added 7,700 machinery workers, 4,200 motor vehicle workers and 1,600 furniture employees. The Labor Department noted that about 8,000 of the net gains in machinery reflected the return of workers from a strike.
Construction added 22,000 as companies staffed up on heavy and civil engineers (10,400) and specialty trade contractors (12,900). Construction employment is off 88,000 jobs from its February 2020 level.
December was a lackluster month for retail as consumer-facing shops actually lost a modest 2,100 jobs in the middle of the all-important shopping season. The Labor Department said sporting goods, hobby, book and music stores lost 12,500 net positions in December but that warehouse clubs and supercenters tacked on 15,000.
Government payrolls also saw net losses in the final month of 2021 as state and local governments shed 5,100 and 7,800 workers, respectively. Overall public-sector employment dropped 12,000.
— CNBC’s Nate Rattner contributed reporting.

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Jobless claims totaled 207,000 for the week ended Jan. 1, higher than the 195,000 estimate and 7,000 more than the previous week.
Continuing claims also rose, climbing to 1.75 million as the omicron spread dented the labor market heading into the end of 2021.
Also, the U.S. trade imbalance rose less than expected in November though it came close to setting a record.

Initial claims for unemployment insurance rose a bit more than expected as the omicron variant spread rapidly through the U.S., the Labor Department reported Thursday.
Jobless claims totaled 207,000 for the week ended Jan. 1, higher than the 195,000 forecast and up 7,000 from the previous period.

Still, the latest data shows claims are well anchored around a level that is even lower than before the Covid-19 pandemic, when claims were averaging around 215,000. The four-week moving average, which accounts for weekly volatility in the numbers, nudged higher to 204,500 for the current period.
“Weekly unemployment claims only ticked up for the latest week, showing the surge in Omicron cases hasn’t increased layoffs,” said Robert Frick, corporate economist at Navy Federal Credit Union. “Given the surge is expected to drop significantly in the next month, and employers are clinging to the workers they have in the face of a record number of employees quitting, omicron may not affect layoffs at all.”
Continuing claims which run a week behind the headline number, also rose, climbing to 1.75 million, for an increase of 36,000.
Weekly claims rose in New York (8,922), Pennsylvania (6,806) and Connecticut (5,992), according to unadjusted data.

In other economic news, the U.S. trade imbalance for goods and services jumped to $80.2 billion in November, an increase from October’s $67.2 billion but below the Dow Jones estimate of $81.5 billion. The total brought the trade shortfall close to September’s record $81.4 billion as the deficit increased with China, the European Union and Canada.

The jobs market, though, is the big focus this week as investors await the closely watched nonfarm payrolls report that the Labor Department will release Friday. Economists expect to see a gain of 422,000 for December, following November’s disappointing 210,000.
Thursday’s claims report won’t figure into that tally, likely showing up more when January’s numbers are compiled.
“The underlying trend in claims is downward but the speed of the drop in October and early November could not be sustained,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. “The fundamentals haven’t changed; the labor market remains extremely tight, and firms won’t let staff go unless they have no other choice. It’s possible that an extended Omicron wave would change that, but the initial impact likely is to make firms even more keen to keep people, as absenteeism due to Covid rockets.”
The total of those receiving benefits across all programs fell by nearly 200,000 to 1.72 million, according to data through Dec. 18.
Though the unemployment rate has dropped to 4.2% from its pandemic-era high of 14.8%, the labor market still has a ways to go before it reaches pre-Covid levels.
Total employment remains about 3.6 million below where it was in February 2020, while the labor force participation rate is 1.5 percentage points lower at 61.8%. However, some Federal Reserve officials said at their December meeting that they see the economy close to full employment, according to meeting minutes released Wednesday.
Payrolls processing firm ADP reported Wednesday that December hiring at private companies totaled 807,000, more than double expectations.
On trade, supply-side shocks that rocked the economy in 2021 persisted into the end of the year, reflected in the strong demand for imported goods over services.
For November, imports rose $13.4 billion from October as the goods deficit increased $15.1 billion to $99 billion while the services surplus was up $2.1 billion to $18.8 billion.
On a year-to-date basis, the trade deficit surged 28.6% from the same period in 2020 as a 20.7% rise in imports outweighed an 18.2% increase in exports.
Correction: Ian Shepherdson is chief economist at Pantheon Macroeconomics. An earlier version misspelled his name.

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Corrected disclosures show that Vice Chair Richard H. Clarida sold a stock fund, then swiftly repurchased it before a big Fed announcement.Richard H. Clarida, the departing vice chair of the Federal Reserve, failed to initially disclose the extent of a financial transaction he made in early 2020 as the Fed was preparing to swoop in and rescue markets amid the unfolding pandemic.Mr. Clarida previously came under fire for buying shares on Feb. 27 in an investment fund that holds stocks — one day before the Fed chair, Jerome H. Powell, announced that the central bank stood ready to help the economy as the pandemic set in. The transaction drew an outcry from lawmakers and watchdog groups because it put Mr. Clarida in a position to benefit as the Fed restored market confidence.Mr. Clarida’s recently amended financial disclosure showed that the vice chair sold that same stock fund on Feb. 24, at a moment when financial markets were plunging amid fears of the virus.The Fed initially described the Feb. 27 transaction as a previously planned move by Mr. Clarida away from bonds and into stocks, the type of “rebalancing” investors often do when they want to take on more risk and earn higher returns over time. But the rapid move out of stocks and then back in makes it look less like a planned, long-term financial maneuver and more like a response to market conditions.“It undermines the claim that this was portfolio rebalancing,” said Peter Conti-Brown, a Fed historian at the University of Pennsylvania. “This is deeply problematic.”The Fed did not provide further explanation of Mr. Clarida’s trade when asked why he had sold and bought in quick succession. Asked if the Fed stood by previous indications that the move was a rebalancing, a spokesperson did not comment.The correction to the disclosures was released late last month and came after Mr. Clarida noticed “inadvertent errors” in his initial filings, a Fed spokesperson said, noting that the holdings were in broad funds (as opposed to investing in individual stocks). Mr. Clarida did not comment for this article.The extent of Mr. Clarida’s transaction is the latest development in a monthslong trading scandal that has embroiled top Fed officials and prompted high-profile departures at the usually staid central bank.Financial disclosures released in late 2021 showed that Robert S. Kaplan, the former Federal Reserve Bank of Dallas president, had made big individual-stock trades, while Eric S. Rosengren, the Boston Fed president, had traded in real estate securities. Those moves drew immediate and intense backlash from lawmakers, ethics experts and former Fed employees alike.That’s because Fed officials were actively rescuing a broad swath of markets in 2020: In March and April, they slashed rates to zero, bought mortgage-tied and government bonds in mass quantities, and rolled out rescue programs for corporate and municipal debt. Continuing to trade in affected securities for their own portfolios throughout the year could have given them room to profit from their privileged knowledge. At a minimum, it created an appearance problem, one that Mr. Powell himself has acknowledged.Mr. Kaplan resigned in September, citing the scandal; Mr. Rosengren resigned simultaneously, citing health issues. Mr. Clarida’s term ends at the close of this month, which it was scheduled to do before news of the scandal broke.Mr. Clarida’s trades, which Bloomberg reported earlier, also raised eyebrows among lawmakers, including Senator Elizabeth Warren of Massachusetts, who has demanded a Securities and Exchange Commission investigation into Fed officials’ 2020 trading. But many ethics experts had seen the transaction as more benign, if poorly timed, because it happened in a broad-based index and the Fed had said it was part of a planned and longer-term investment strategy.The new disclosure casts doubt on that explanation, given that Mr. Clarida sold out of stocks just days before moving back into them.“It’s peculiar,” said Norman Eisen, an ethics official in the Obama White House who said he probably would not have approved such a trade. “It’s fair to ask — in what respect does this constitute a rebalancing?”It is unclear whether Mr. Clarida benefited financially from the trade, but it was most likely a lucrative move. By selling the stock fund as its value began to plummet and buying it back days later when the price per share was lower, Mr. Clarida would have ended up holding more shares, assuming he reinvested all of the money that he had withdrawn. The financial disclosures put both transactions in a range of $1 million to $5 million.The sale-and-purchase move would have made money within a few days, as stock markets and the fund in question increased in value after Mr. Powell’s announcement. The investment would have then lost money as stocks sank again amid the deepening pandemic crisis.But the fund’s value recovered after the Fed’s extensive interventions in markets. Assuming they were held, the holdings would ultimately have appreciated in value and turned a bigger profit than they would have had Mr. Clarida merely held the original investment without selling or buying.The Fed was aware of the reputational risk around trading as the pandemic kicked into high gear — the Board of Governors’ ethics office sent an email in late March 2020 encouraging officials to hold off on personal trades — but notable transactions happened in late February and again as early as May in spite of that, its officials’ disclosures suggest.Mr. Powell has acknowledged the optics and ethics problem the trading created, saying that “no one is happy” to “have these questions raised.” He and his colleagues moved quickly to overhaul the Fed’s trading-related rules after the revelations, releasing new and stricter ethics standards that will force officials to trade less rapidly while banning many types of investment.The individuals in question also faced censure. They are under independent investigation to see if their transactions were legal and consistent with internal central bank rules. The S.E.C. declined to comment on whether it has opened or will open an investigation into Mr. Clarida’s trades and his colleagues’, as Ms. Warren had requested.While the officials who came under the most scrutiny for their trades have left or will leave soon, the new disclosure could cause problems for the Fed’s remaining leaders — including Mr. Powell, whom President Biden recently renominated to a second term as chair.Mr. Powell will appear before the Senate Banking Committee next week for his confirmation hearing, as will Lael Brainard, a Fed governor, whom Mr. Biden nominated to replace Mr. Clarida as vice chair.Both could face sticky questions about why a Fed culture permissive of trading at activist moments was, until recently, allowed to prevail. Mr. Powell led the organization, while Ms. Brainard headed the committee in charge of reserve bank oversight.Jerome H. Powell and his colleagues moved quickly to overhaul the Fed’s trading-related rules after the revelations.Stefani Reynolds for The New York TimesThe trading scandal has also resurfaced longstanding concerns about whether the Fed is too cozy with Wall Street, and whether its officials are working for the public or to profit from their own actions.If he is asked about the scandal, Mr. Powell is likely to point to the tougher ethics guidelines that the Fed unveiled in October. Mr. Clarida’s apparently rapid transaction would most likely have been trickier under the new rules, which require officials to give 45 days’ notice before buying an asset, and which prevent trading during tumultuous market periods.The updated disclosures do show that Mr. Clarida was “in compliance with applicable laws and regulations governing conflicts of interest,” based on the Fed ethics officer’s assessment. But that alone is unlikely to prevent scrutiny.Regardless of legality, “the public would be concerned if it turned out that he bought shares of the fund before a major announcement by the Federal Reserve potentially affecting the value of his shares,” Walter Shaub, a former government ethics official now at the Project on Government Oversight, said in an email.Mr. Shaub said more information was needed to know if the trade was problematic, including whether Mr. Clarida knew the Feb. 28 announcement was coming — and when he knew that.The Fed previously told Bloomberg that Mr. Clarida was not yet involved in deliberations about the coronavirus response at the time of the trade.But Mr. Clarida was in close touch with his colleagues throughout that week. He had a call with a board member and a regional Fed president on Feb. 26, his calendars show. That is the way the Fed typically lists meetings of the Fed chair, vice chair and New York Fed president — the Fed’s so-called troika, which sets the agenda for central bank policy — on its largely anonymized official calendars.Mr. Conti-Brown said that regardless of how much Mr. Clarida knew about his colleagues’ plans, the February trades were an issue that the Fed needed to explain in detail.“Richard Clarida is a decision maker,” he said. “The deliberations that happen within his brain are what matter here.” More

Minutes from the Fed’s December meeting indicated that officials are ready to aggressively dial back policy help.
One key aspect, the central bank’s balance sheet, was the subject of extended discussion, with policymakers pointing to a reduction in bond holdings in the coming months.
Members expressed concern about inflation and said the jobs market is nearing full employment.
Stocks slid following the release, while government bond yields rose.

The Federal Reserve at its December meeting began plans to start cutting the amount of bonds it is holding, with members saying that a reduction in the balance sheet likely will start sometime after the central bank begins raising interest rates, according to minutes released Wednesday.
While officials did not make any determination about when the Fed will start rolling off the nearly $8.3 trillion in Treasurys and mortgage-backed securities it is holding, statements out of the meeting indicated that process could begin in 2022, possibly in the next several months.

“Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate,” the meeting summary stated.
Market expectations currently are for the Fed to start raising its benchmark interest rate in March, which would mean that balance sheet reduction could start before summer.
The minutes also indicated that once the process begins, “the appropriate pace of balance sheet runoff would likely be faster than it was during the previous normalization episode” in October 2017.
The size of the Fed’s balance sheet is significant because the central bank’s bond purchases have been considered a key element in keeping interest rates low while boosting financial markets by keeping money flowing.
Wall Street reacted negatively to the news, with stocks falling and government bond yields rising on the prospect of a tighter Fed in 2022.

Fed officials said repeatedly during the meeting that they believe ultra-easy policies instituted in the early days of the Covid-19 pandemic were no longer warranted or justified. Addressing the key pillars of their dual goals, committee members expressed concern over surging inflation while saying they see the jobs market at close to full employment.

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“They did more than talk about this. Obviously, there was a fairly lengthy discussion. This was a pretty serious conversation,” Kathy Jones, chief fixed income strategist at Charles Schwab, said of the minutes, which had a special section titled “Discussion of Policy Normalization Considerations.”
“The fact that almost all participants agreed that it was appropriate to initiate the balance sheet runoff after the first increase in the target range for the fed funds rate implies that there’s not a big appetite for ‘let’s wait and see.'” Jones added. “Last time, they waited two years. This time, it looks like they’re ready to go.”
During that 2017-19 reduction, the Fed allowed a capped level of proceeds from the bonds it holds roll off each month while reinvesting the rest. The central bank started by allowing $10 billion of Treasurys and mortgage-backed securities each quarter to roll off, increasing by that much each period until the caps reached $50 billion.
The program was intended to get the balance sheet down considerably but was short-circuited by global economic weakness in 2019, followed by the pandemic crisis in 2020. In all, the reduction amount to only about $600 billion. Former President Donald Trump was a vocal critic of the program, sometimes referred to as “quantitative tightening,” as he lambasted Fed officials.

Rate hikes, tapering ahead

As expected, the Fed’s policymaking group following the December meeting kept its benchmark interest rate anchored near zero. However, officials also indicated that they foresee up to three quarter-percentage point increases in 2022, as well as another three hikes in 2023 and two more the year after that.
Officials at the meeting indicated that inflation gauges “had been higher and were more persistent than previously anticipated,” the minutes stated. While members said they think growth will be “robust” in 2022, they also said inflation poses a strong risk, perhaps even more so than the pandemic.
Consequently, they said it would be time to tighten policy sooner than anticipated.
“Some participants judged that a less accommodative future stance of policy would likely be warranted and that the Committee should convey a strong commitment to address elevated inflation pressures,” the minutes said.
Along those lines, the committee announced it would speed up the tapering pace of its monthly bond-buying program. Under the new plan, the program would now end around March, after which it would free up the committee to start hiking rates.
Current fed fund futures market pricing is indicating about a 2-to-1 chance of the first hike coming in March, according to the CME’s FedWatch Tool. Traders figure the next increase would come in June or July, followed by a third move in November or December.
Fed officials indicated that the reasoning behind the moves was in response to inflation that is higher and more persistent than they had figured. Consumer prices are rising at their fastest pace in nearly 40 years.

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Federal Reserve officials suggested that they might withdraw support for the economy more quickly than policymakers had previously expected, minutes from their December meeting showed, as a moment of uncomfortably high inflation forces them to reorient their policy path.Central bankers projected last month that they would raise interest rates three times in 2022 as the economy healed and inflation remained above the Fed’s target. Economists and investors think that those increases could begin as soon as March, which is when the Fed is now expected to wrap up the large-scale bond buying program it has been using in tandem with low rates to stoke the economy.Fed officials pointed to a stronger outlook for economic growth and the labor market as well as continuing inflation, saying that “it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” according to the minutes, which were released Wednesday.Officials might then move to further cool off the economy by reducing the size of their balance sheet — where the bonds they bought are held. That could help to push up longer-term interest rates, which would make borrowing for many types of purchases more expensive and further weaken demand.“Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate,” the minutes stated.Markets reacted swiftly to the news. The major stock benchmarks, which had been slightly lower on Wednesday, dropped sharply after the Fed published the document at 2 p.m. The S&P 500 fell 1.9 percent, its biggest drop in weeks.Government bond yields, a proxy for investor expectations about interest rates, jumped. The yield on 10-year Treasury notes climbed as high as 1.71 percent, its highest since April.What to Know About Inflation in the U.S.Inflation, Explained: What is inflation, why is it up and whom does it hurt? We answered some common questions.The Fed’s Pivot: Jerome Powell’s abrupt change of course moved the central bank into inflation-fighting mode.Fastest Inflation in Decades: The Consumer Price Index rose 6.8 percent in November from a year earlier, its sharpest increase since 1982.Why Washington Is Worried: Policymakers are acknowledging that price increases have been proving more persistent than expected.The Psychology of Inflation: Americans are flush with cash and jobs, but they also think the economy is awful.The Fed’s big asset purchases had been adding juice to the economy and markets with each passing month, so cutting them off will provide less momentum. Raising interest rates could do even more to slow growth: By making borrowing costs for houses, cars and credit cards more expensive, higher rates should slow spending, weigh on investment and eventually hold back hiring and tamp down prices.The Fed faces trade-offs as it contemplates the path ahead. Higher interest rates could weaken a job market that is still pulling people back from the sidelines after 2020 pandemic lockdowns. But if the Fed waits too long or moves too slowly, businesses and consumers could begin to adjust their behavior to the very high inflation that has dogged the economy much of the past year. That could make it harder to bring price gains back under control — forcing more drastic, and potentially even recession-causing, rate increases down the road.The minutes showed that both considerations weighed on policymakers’ minds as they considered their future actions, but as the labor market has healed swiftly, they have begun turning their attention decisively toward the threat of too-high inflation. The Fed is tasked with two main jobs, fostering maximum employment and keeping prices relatively stable.“Several participants remarked that they viewed labor market conditions as already largely consistent with maximum employment,” the minutes said. At the same time, some officials noted that it might be smart to raise rates even if the job market was not fully recovered if inflation showed signs of jumping out of control.“It does cement that they’re definitely pivoting strongly toward rate hikes,” Michael Feroli, chief U.S. economist at J.P. Morgan, said after the release. Although it’s hard to pin down the timing, he said, “they are moving toward putting policy in a more restrictive setting.”There’s 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 pop temporarily as pandemic-affected sectors like airlines and restaurants recovered, then return to normal.Instead, prices through November climbed the most since 1982, and monthly gains remained brisk. Factory shutdowns and tangled shipping lines have made it hard for suppliers to catch up with booming consumer demand for goods, forcing costs up. Price gains have also begun to spread: Rents are increasing more quickly, which could make high inflation more persistent.Inflation is broadly expected to fade this spring, as prices are measured against relatively high levels from a year earlier. Prices may also decelerate as producers catch up with demand, officials hope. But policymakers lack certainty about when that will happen.Inflation F.A.Q.Card 1 of 6What is inflation? More