With inflation punishing consumers and threatening the economy, the Federal Reserve this week will likely signal its intent to begin raising interest rates in March for the first time in three years. The Fed’s challenges will get only harder from there.

Among the central bank officials, there is broad support for a rate increase — one that would come much sooner than the officials had expected just a few months ago. But after that, their policymaking will become more complicated and could sow internal divisions, especially as a number of new officials join the Fed.

Accelerating inflation could cause the Federal Reserve to get even more aggressive than economists expect in the way it raises interest rates this year, according to a Goldman Sachs analysis.

With the market already expecting four quarter-percentage-point hikes this year, Goldman economist David Mericle said the omicron spread is aggravating price increases and could push the Fed into a faster pace of rate increases

Stocks turned sharply lower after the minutes were released Wednesday afternoon. The blue-chip Dow Jones Industrial Average fell 1.1%, while the tech-heavy Nasdaq Composite Index lost 3.3%.

The rising inflation rate is translating to a higher bond yield. As the US inflation for October’21 got released, the US 3-month treasury bill yield inched to 0.43 percent, and the 10-year bond yield reached 1.5 percent (as on 10th November’21). There’s a direct correlation between the rising inflation rate and bond yield. As the inflation rate rises, investors demand higher returns to compensate for the inflation risk, reflected in the increasing bond yields.

The higher inflation data along with the rise in the bond yields has also pushed the stock markets to red. Though the consensus is that the Fed would go for a rate hike only by 2023, if the higher inflation is not retreating, there is a risk of an earlier hike. And, going by the current trend, high inflation prints are expected in CY22 also. High inflation rate when the economies are recovering from one of the worst-hit crises is adding more pain.

Meanwhile, government bond yields rose Wednesday. After the minutes were released, trading in interest-rate futures markets implied a roughly two-thirds probability that the Fed would raise rates in March, according to CME Group.

Julia Coronado, the founder of economic-advisory firm MacroPolicy Perspectives, said that the minutes prompted her to move up her forecast for rate increases to begin in March, instead of June.

“The Fed is on a glide path to hiking in March,” said Neil Dutta, an economist at research firm Renaissance Macro. “It is hard to see what is going to hold them back.” 

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