U.S. consumer prices rose last year by the most in nearly 40 years, and sizzling inflation created the conditions for the Federal Reserve to start raising interest rates as early as March. The consumer price index rose 7% in 2021, the biggest 12-month gain since 1982, according to data released by the Labor Department on Wednesday. CPI rose 0.5% month-on-month in December, beating expectations. The median forecast of economists surveyed by Bloomberg for December was for the CPI to rise 7% year-on-year and 0.4% month-on-month.

Fed Governor Lael Brainard said addressing inflation and bringing it back to 2 percent while maintaining an inclusive recovery is the Fed's most urgent task. "Inflation is so high that people across the country are worried about their wages," Brainard said in remarks prepared for the Senate Banking Committee's nomination hearing for the Fed's vice chair. "The focus of our monetary policy is to bring inflation down to 2 percent while maintaining an inclusive recovery. That is our most important task." The hearing will be held in Washington at 10 am local time on Thursday. U.S. President Joe Biden nominated Brainard to replace Richard Clarida as Fed vice chair. Clarida resigned two weeks before his term expired after it was revealed that he was buying and selling stock funds ahead of a major Fed decision in early 2020.

Cleveland Fed President Loretta Mester said the Fed should shrink its balance sheet as quickly as possible without affecting financial markets. It reiterated its support for a rate hike in March. "The case for pulling back from easing is very strong, and we're also looking at what to do with our balance sheet and bring our assets down," Mester said on Wednesday during a Wall Street Journal live event on Twitter. The U.S. is headed toward its worst inflation in four decades, with investors expecting the Federal Reserve to raise interest rates at its March meeting and hint at shrinking its $8.8 trillion balance sheet later in 2022. Data from the U.S. Labor Department earlier Wednesday showed the CPI climbed 7 percent in 2021, the largest year-on-year gain since June 1982.

St. Louis Fed President James Bullard told The Wall Street Journal that four rate hikes may be needed this year with inflation stubbornly high. "I now actually think we should raise rates four times in 2022," said Bullard, who previously expected three rate hikes this year. "It would have been better if there were two rate hikes in the first half." "We want to control inflation in a way that doesn't damage the real economy, and firmly expect inflation to return to 2% in the medium term."

The U.S. economy grew moderately in the final weeks of last year, the Federal Reserve said, but business expectations for growth in the coming months have cooled in some regions. "Optimism remains high, but slightly lower than before, as a smaller percentage of companies are optimistic about sustained economic growth over the next six months," the Fed said in its Beige Book survey on Wednesday. The report is based on information collected by the 12 regional Fed banks as of Jan. 3 and compiled by the Kansas City Fed. Ten of the 12 regional Fed banks said the omicron had impacted economic activity, adding to labor challenges. "Respondents in most Fed jurisdictions reported substantial increases in prices charged to customers, although others noted a slight slowdown in price increases," the Fed said.

The head of the International Monetary Fund (IMF) said the world faces greater uncertainty and potential turmoil this year as the economic recovery slows and risks from inflation to supply chain bottlenecks and even social instability loom. IMF Managing Director Georgieva said at an online event on Wednesday that the IMF was bracing for a potential increase in loan demand this year, amid tightening central bank monetary policy and rising debt in many developing countries. The outbreak has led to two years of economic turmoil, and discontent could spark greater instability in some countries, she said.

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