By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – Futures on the federal funds rate on Wednesday have priced in a roughly 80% chance of a quarter-percentage-point rate hike by the Federal Reserve at the March meeting following the release of the U.S. central bank’s minutes of its last policy meeting.

Rate futures for the year indicate that there will be three rate hikes in 2022.

According to the minutes from the December 14-15 central bank policy meeting, Fed officials stated that the U.S. labor markets was “very tight”. They might require the Fed to increase interest rates earlier than anticipated but also to reduce its total asset holdings in order to curb high inflation.

Participants also suggested that the Fed could reduce its balance sheet as soon as it raises the Fed funds rate. It is believed that the Fed’s current balance sheet totals $8.5 trillion.

“The minutes suggest that they will start tightening earlier than expected and may extend it. Kim Rupert is Action Economics’ managing director for fixed income.

“Considering shrinking the balance sheets faster than expected, this might reduce the rate of interest hikes. That’s what I feel the Fed has mentioned.

Rate futures were fully priced for the Fed’s December meeting.

U.S. yields rose and the curve flattened in the Fed minutes, as investors awaited what might be several hikes that could push short-term rates higher. [US/]

Analysts considered the possibility of an increase in the March interest rate too optimistic given possible moderation of growth and the rise in COVID-19 case numbers.

March is certainly aggressive but the Fed is outpacing the market. Ellis Phifer (managing director fixed income research Raymond James), stated that it is more June or May.

“If data is available that shows pricing pressures are decreasing and delivery times are slowing, then I imagine this would cause rate increases to be pushed back just a bit. This would make us near the peak of inflation in the year.