The Federal Reserve is prepared to raise interest rates and shrink its balance sheet in the coming year, but when exactly and by how much is still an open question, according to the minutes released on Wednesday from the January FOMC meeting
For those who were hoping for a larger rate hike in March than the widely anticipated .25 percent, Fed officials offered few hints about their plans beyond an openness to speed up the pace of rate hikes if inflation does come down.
The language suggests the Fed is still holding out for a possible shift in the economy that could temper the need for a hard turn into monetary tightening.
Not every Fed official is taking such a careful approach. St. Louis Fed President Jim Bullard in recent weeks has broken with Fed norms and pushed for a full 1 percent hike by July.
Dean Smith, chief strategist and portfolio manager at FolioBeyond, said the lack of any hints of a bigger hike is a sign that Bullard might be in the minority.
"Sadly, the committee has decided not to heed his advice regarding the need for quick bold action," said Smith. "As someone once said of Jimmy Carter — more mush from the wimp."
Kathy Bostjancic, the chief U.S. financial economist for Oxford Economics, drew a different conclusion.
"With recent inflation readings for January greatly exceeding expectations, notably CPI but also including PPI and import prices, we now join the camp arguing the Fed should and will kick off its tightening cycle with a 50bps rate hike in March," she said in a note.
Fed officials did note in the minutes that inflation was proving more persistent than expected and that it was also spreading beyond goods impacted by supply chain issues.
"Participants remarked that recent inflation readings had continued to significantly exceed the Committee's longer-run goal and elevated inflation was persisting longer than they had anticipated, reflecting supply and demand imbalances related to the pandemic and the reopening of the economy," the document said.
As for shrinking the Fed's nearly $9 trillion balance sheet, officials said a faster runoff may be in order, but that they were still unsure about how much should be pumped back into the economy.
"While participants agreed that details on the timing and pace of balance sheet runoff would be determined at upcoming meetings, participants generally noted that current economic and financial conditions would likely warrant a faster pace of balance sheet runoff than during the period of balance sheet reduction from 2017 to 2019."
While decrypting the Fed always leads to some disagreement, some saw the minutes as a repeat of what the market is already anticipating.
"Today the Fed served a nothing burger and the market loves it," wrote David Russell, vice president of market intelligence at TradeStation Group, in an email. "The dollar weakness confirms what I've been expecting, the market has accepted the rate hikes and the shock is fading. We also see from the retail sales data that no matter what people say about inflation in the consumer sentiment poll, they continue to spend."