Fed officials now seeing U.S. job market near full recovery

The U.S. job market is nearly at levels healthy enough that the central bank's low-interest rate policies are no longer needed, Federal Reserve officials concluded last month, according to minutes of the meeting released Wednesday.

Fed officials also expressed concerns that surging inflation was spreading into more areas of the economy and would last longer than they previously expected, the minutes said.

“Many (policymakers) saw the U.S. economy making rapid progress" toward the Fed's goal of “maximum employment,” the minutes said. “Several” officials said they felt the goal had already been reached.

The minutes underscored the Fed’s sharp pivot from what had been its policy through most of the pandemic, shifting from keeping interest rates very low to encourage more hiring, to moving quickly towards raising rates to rein in inflation, which has surged to four-decade highs.

Fed officials also voiced heightened concerns about inflation, a development that pushed down stock prices after the minutes were released. Bond yields also rose in response. The yield on the 10-year Treasury note, a benchmark for setting rates on mortgages and many other kinds of loans, increased to 1.7% soon after the minutes were released, from 1.68% just before.

“Inflation readings had been higher and were more persistent and widespread than previously anticipated,” the minutes said. “Some participants noted that ... the percentage of product categories with substantial price increases continued to climb.”

With inflation worsening and unemployment falling more quickly than many economists expected, Fed Chair Jerome Powell said after the Dec. 14-15 meeting that the central bank was accelerating the reduction of its ultra-low interest rate policies.

The Fed said last month that it would reduce the monthly bond purchases it has made since the spring of 2020 — which are intended to lower long-term rates — at twice the pace it had previously set and will likely end those purchases in March. That accelerated timetable puts the Fed on a path to start hiking its benchmark short-term interest rate as early as the first half of next year.

Fed policymakers also suggested they could hike the Fed's short-term benchmark interest rate three times this year. That signaled a significant pickup from their September meeting, when the 18 policymakers split over whether to lift rates a single time in 2022.,

Even Fed officials who have long been focused on keeping rates low to combat unemployment — such as San Francisco Federal Reserve Bank President Mary Daly and Minneapolis Fed President Neel Kashkari — now cite concerns about high inflation as a reason for raising interest rates this year.

The Fed’s key rate, which has been pinned near zero for nearly two years, influences many consumer and business loans, including mortgages, credit cards and auto loans. Rates for those loans may start to rise, too, later this year, though changes in Fed policy don't always immediately feed into other borrowing costs.