MNI STATE OF PLAY:Record Inflation Spurs Faster Fed Tightening

The Federal Reserve is expected to scale back its pandemic-era asset purchase program more quickly on Wednesday and pencil in two to three rate hikes next year after inflation hit a 39-year high last month.

U.S. inflation topped 6.8% in November and core CPI hit 4.9% as strong demand for cars and furniture were again met with supply shortages. Price pressures have also broadened in recent months, with shelter costs climbing steadily and restaurant industry wage hikes filtering through to higher dining out prices.

Ex-officials interviewed by MNI expect a likely doubling of the pace of QE tapering to USD30 billion in January and February, giving policymakers the option to lift interest rates from near zero as soon as the March FOMC meeting.

An updated quarterly Summary of Economic Projections is likely to show policymakers forecasting at least two rate hikes for next year with some seeing three or more if price pressures fail to abate, ex-officials said, marking a fast pivot from the last set of forecasts that saw the FOMC divided on whether to raise rates at all next year.

DIMINISHING SLACK

Richmond Fed research director Kartik Athreya told MNI this month the Fed must "prepare the ground" for rate hikes in the face of more persistent inflation, especially as the new Omicron variant isn't expected to dent growth but could actually worsen supply chain problems globally.

But Fed staffers may still be holding on to the notion that inflation is largely temporary even as the FOMC is expected to officially retire the term "transitory" at Wednesday's meeting.

Fed economists played down worries that rapid wage growth could trigger higher inflation in interviews last month.

Very strong labor demand and a stubbornly slow uptick in worker participation, however, are adding to pressure for tighter monetary policy. The labor market is still some 5 million workers short of pre-pandemic levels but the unemployment rate has fallen more quickly than expected to 4.2%, close to the FOMC's estimate of its natural rate of 4%.

"Slack is diminishing," Powell told lawmakers last month.