Federal Reserve officials discussed at the March meeting how to cut their trillions of bonds, with a consensus of about $ 95 billion, the minutes released Wednesday showed.
Officials “generally agreed” that the $ 60 billion limit on Treasurys and the $ 35 billion on mortgage-backed securities would be phased out within three months. That total will more than double the rate of last attempt from 2017-19, and this marks part of a historic shift from a much easier monetary policy.
In addition to the balance sheet talks, officials also discussed the pace of interest rate hikes as members lean toward more aggressive moves.
At the meeting, the central bank approved its first interest rate hike in more than three years. The 25-point increase – a quarter of a percentage point – raised short-term borrowing rates from close to zero since March 2020.
However, minutes pointed to potential rate hikes of 50 basis points in the upcoming meetings, which coincide with the market price for the May vote. In fact, there was a significant sense of going high last month. The uncertainty of the war in Ukraine prevented some officials from making the 50-point point move in March.
“Many participants noted that one or more 50 basis point increases in the target range would be appropriate at future meetings, especially if inflationary pressures rise or intensify,” Minutes said.
Shares The central bank collapsed following the release When government bonds are high. However, the market came out of its slump as traders adjusted to the new face of the central bank.
These minutes are “a warning to anyone who thinks the central bank will be too bad in their fight against inflation,” said Quincy Krosby, a leading stock strategist at LPL Financial. “Their message is, ‘You’re wrong.'”
In fact, in recent days policymakers have grown increasingly rigid in their views on controlling inflation.
Governor Lale Brinard said on Tuesday that lowering prices would require steady rises and a reduction in the aggression balance sheet. Markets expect the Fed to raise a total of 250 basis points this year.
Crosby said the position of policymakers should not come as a surprise.
“The federal government has planned a concerted effort to warn the market that this is serious, and most importantly, we are going to fight inflation,” he said. “Being on their side is a more healthy job market. It’s important. What you do not like creates a central bank policy error.”
The central bank’s relative hawk balance has been extended until the talk. Some members did not want to reduce the monthly runoff level, while others said it was fine with “relatively high” limits.
The balance sheet settlement will allow the central bank to reduce the amount of income available through the bonds maturing each month when reinvesting the balance. Short-term treasury bills will be targeted because they are “high value as safe and liquid assets by the private sector.”
Minutes indicated that although officials did not cast any formal ballots, members agreed that the process could begin in May.
However, it is still questionable whether the runoff will actually reach $ 95 billion. MBS demand is now disabled due to declining refinancing demand and rising interest rates. Officials acknowledged that the sluggish flow of mortgages would not be enough, and that the direct sale would be considered “after the balance sheet runoff is well underway.”
At the meeting, central bank officials sharply raised their inflation outlook and lowered their economic growth expectations. Rising inflation is the driving force behind central bank austerity.
Markets were expecting a minute release on details of where monetary policy is heading from here. In particular, Fed President Jerome Powell said in a post-meeting press conference that Minutes would provide details on thinking about reducing the balance sheet.
The central bank expanded its holdings to about $ 9 trillion or more during monthly bond purchases in the wake of the epidemic. Despite evidence of higher inflation than the United States has seen since the early 1980s, the acquisition ended a month ago when then-President Paul Volker suppressed the economy by dragging it into recession.
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