Minutes show that Fed officials are planning to cut the balance sheet and are thinking of accelerating rate hike

Federal Reserve members “generally” agree to reduce the monetary authority’s balance sheet to about $95 billion in a “phased manner,” according to the minutes of the last meeting of the Federal Reserve’s Open Market Committee (FOMC), released on Wednesday (6). a The meeting was held on March 16thThe Monetary Authority announced the first interest rate increase since 2018, by 0.25 percentage points.

The administration agreed that monthly limits of about $60 billion for Treasuries and about $35 billion for MBS would likely be appropriate. Officials also generally agreed that limits could be implemented over three months or a little longer if market conditions called for it.

Participants also “broadly agreed” that after the balance sheet reduction is in “in full swing,” it would be appropriate to consider MBS direct sales, according to the minutes released on Wednesday.

No final decision has been made, according to the minutes, but officials have made “substantial progress” and could “initiate the process of reducing the size of the balance sheet shortly after the conclusion of the May 3-4 policy meeting.” He said.

The minutes of the last meeting also indicated that many leaders considered a 0.5 percentage point increase in interest rates as possible in upcoming meetings, “particularly if inflationary pressures remain high or intensifying.” The debate over the possible acceleration of interest rate hikes after the 0.25 point hike at the March meeting has gained traction in the market amid the continued rally in prices.

“Many participants noted that – with inflation well above the committee’s target, upward inflation risks and the base rate well below its long-term estimates – they would have preferred a 50 basis point (or 0.5 basis point) increase in the target range,” the minutes read. . However, given the increased near-term uncertainty associated with the Russian invasion of Ukraine, some felt that a 0.25 point increase would be appropriate at the March meeting.

The document highlighted that “all participants indicated their strong commitment and determination to take the necessary measures to restore price stability.” Committee members felt that it would be appropriate to quickly change the monetary policy stance to a neutral one. They also noted that depending on economic and financial developments, a shift to a tougher stance could be justified.”

In discussing monetary policy during the last meeting, the committee members agreed to continue strengthening indicators of economic activity and employment. Employment gains have been strong in recent months and the unemployment rate has fallen significantly. Members also agreed that inflation remains high, reflecting persistent supply and demand imbalances, rising energy prices and increasing price pressures.

Moreover, the members of the Federal Reserve agreed in the minutes that Russia’s invasion of Ukraine had caused enormous human and economic hardship, noting that the repercussions of the war on the US economy were highly uncertain. They considered that the invasion and related events, in the short term, are likely to create additional pressure on inflation and affect economic activity.

High expectations for the document

There was market expectation that the minutes would indicate how quickly and to what extent monetary policy makers would act to “dispose” of the $4.6 trillion in Treasuries and mortgage-backed securities accumulated since March 2020, as well as to provide more information about the rate of rise. Interest rates by the monetary authority.

Last Tuesday (5), Lyle Brainard, who was nominated by US President Joe Biden at the end of last year for the position of Vice Chairman of the Federal Reserve, said that “it is necessary to reduce inflation” and that the Fed will tighten monetary policy “systematically”
Through a “series of interest rate hikes” and an “accelerated” cut to the US central bank’s balance sheet, starting from next month’s meeting.

On the same day, Mary Daly, head of the San Francisco division of the Federal Reserve, said in a speech that US inflation, at its highest level in four decades, is “as harmful to people as the unemployed are.” And that raising interest rates is “necessary to ensure that people can sleep at night without fear that rates will be much higher when they wake up the next day.”

What made these statements all the more significant is that Lyle Brainard and Mary Daly belong to the “dovish” wing of the Federal Reserve. In other words, they advocate a more tolerant approach to inflation and less hawkish action in fighting it. However, if both are very clear about the need To combat price hikes, it is clear that the Fed’s patience on inflation has run out,” notes an analysis by Levante Edeas de Investments.

Last month, the Fed raised interest rates by 0.25 percentage points, the first in a series of expected increases for this year and next. Meanwhile, plans to reduce the size of the Federal Reserve’s portfolio are increasing pressure on credit markets by reducing demand for assets held by the central bank, which increases pressure on interest rates.

For Luca Mercadanti, an economist in Rio Bravo, the minutes reinforce the Fed’s “hawkish” tone, boosting the possibility of a 0.5 point rate hike.

“Markets have already considered this possibility, but communications have reinforced it,” notes Luca Mercadanti, an economist in Rio Bravo.

Mercadante also notes that the Fed has detailed the speed of the asset balance reduction, which will occur at a faster pace than the previous reduction. The maximum speed of balance sheet reduction should be $95 billion per month, to be reached in 3 months, with the process likely to start after the next meeting in May. Despite the details, the markets are already priced in the move.

(with Reuters)

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