MNI BRIEF: Fed Sees Faster Tightening If Inflation Persists

Federal Reserve officials considered sharper interest-rate hikes than previously anticipated and "significant" reduction in the USD8.7 trillion balance sheet amid a prolonged bout of inflation, minutes from the January meeting showed.

"Most participants noted that, if inflation does not move down as they expect, it would be appropriate for the Committee to remove policy accommodation at a faster pace than they currently anticipate," the FOMC minutes said. The U.S. consumer price index hit a 40-year high of 7.5% in January. "Participants agreed that uncertainty regarding the path of inflation was elevated and that risks to inflation were weighted to the upside," the report said.

With regards to the balance sheet, officials agreed that "in light of the current high level of the Federal Reserve's securities holdings, a significant reduction in the size of the balance sheet would likely be appropriate."

The Fed described the labor market as having made "remarkable progress." Investors expect the Fed to hike in March -- the only question is whether they will do it by 25bps or shock markets with a 50bps move. Most policymakers have pushed back against the latter, but St. Louis Fed President James Bullard recently came out in favor.