Fed officials plan to shrink the balance sheet by $95 billion a month, meeting minutes indicate

Fed officials plan to shrink the balance sheet by $95 billion a month, meeting minutes indicate

Federal Reserve officials discussed how they want to reduce their trillions in bond holdings at their March meeting, with a consensus amount around $95 billion, minutes released Wednesday showed.

Officials “generally agreed” that a limit of $60 billion in Treasurys and $35 billion in mortgage-backed securities would be allowed to roll off, phased in over three months.

At the meeting, the Fed approved its first interest rate increase in more than three years. The 25 basis point increase — a quarter percentage point — lifted the benchmark short-term borrowing rate from the near-zero level where it had been since March 2020.

In addition to the balance sheet talk, officials also discussed the pace of interest rate hikes ahead, with members leaning toward more aggressive moves.

That means potential rate hikes of 50 basis points at upcoming meetings, a level consistent with market pricing for the May vote. In fact, there was considerable sentiment to go higher last month.

“Many participants noted that — with inflation well above the Committee’s objective, inflationary risks to the upside, and the federal funds rate well below participants’ estimates of its longer-run level — they would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting,” the minutes said.

Uncertainty over the war in Ukraine deterred some officials from going with the 50 basis point move.

Also at the meeting, Fed officials also sharply raised their inflation outlook and lowered their economic growth expectations.

Markets were looking to the minutes release for details about where monetary policy heads from here. Specifically, Fed Chairman Jerome Powell said in his post-meeting news conference that minutes would provide details on the thinking about balance sheet reduction.

The Fed expanded its holdings to about $9 trillion, or more than double, during monthly bond purchases in the wake of the pandemic crisis. Those purchases ended only a month ago, despite evidence of roaring inflation higher than anything the U.S. had seen since the early 1980s, a surge that then-Chairman Paul Volcker quelled by dragging the economy into a recession.

Policymakers in recent days have grown increasingly strident in their views about taming inflation.

Governor Lael Brainard said Tuesday that bringing prices down will require a combination of steady hikes plus aggressive balance sheet reduction. Markets expect the Fed to hike rates a total of 250 basis points this year.

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