(Bloomberg) — The Federal Reserve said it will reduce its massive bond holdings at a maximum rate of $95 billion per month, further restricting credit across the economy as the central bank raises interest rates to cool inflation highest in four decades.
The minutes of their March meeting released on Wednesday also showed that “many” officials would have preferred to increase rates by half a percentage point, rather than a quarter-point increase, but decided not to do so in light of Russia's invasion of Ukraine.
The maximum total, made up of $60 billion in Treasury bonds and $35 billion in mortgage-backed securities, compares to the maximum rate of US$50 billion per month during the last time the Fed cut its balance sheet between 2017 and 2019.
“Overall, participants agreed that monthly limits of around $60 billion for Treasury securities and about $35 billion for the agency's mortgage-backed instruments would likely be appropriate,” the Fed said Wednesday in the minutes of the Federal Market Committee meeting Open (FOMC) on March 15 and 16. “Participants also generally agreed that the limits could be implemented gradually over a period of three months, or a little longer, if market conditions warrant it.”
May Meeting
The FOMC is expected to approve the balance sheet reduction at its next meeting on May 3-4. The roadmap to reduce the balance sheet came through a presentation by the staff to the officials.
“The participants agreed that they had made substantial progress on the plan and that the Committee was well positioned to begin the process of reducing the size of the balance sheet after the conclusion of its next meeting in May,” the minutes showed.
The measure to reduce the balance sheet will extend a sharp turn towards the fight against inflation, since until last month the Fed was buying bonds while trying to gradually reduce pandemic support.
US central bankers raised interest rates by a quarter of a percentage point at the March meeting, raising them from almost zero, where they had held since March 2020 as the pandemic spread. They pointed to six other increases of this magnitude this year to cool the highest inflation in four decades. Reducing the size of their balance sheet — which soared to $8.9 trillion when they bought bonds intensively to protect the economy from the covid-19 pandemic — will also help tighten financial conditions.
“Many participants noted that — with inflation well above the Committee's target, rising inflationary risks and the federal funds rate well below participants' estimates of its long-term level — they would have preferred an increase of 50 basis points in the target range for the funds rate at this meeting,” says the minutes. “However, in light of increased short-term uncertainty associated with Russia's invasion of Ukraine, they judged an increase of 25 basis points would be appropriate at this meeting.”
Since then, monetary policymakers have said they could move faster in the adjustment, after the Russian invasion of Ukraine caused food and energy prices to skyrocket. Fed Chair Jerome Powell indicated that a half-point increase was on the table if needed for his policy meeting on May 3-4.
Investors have discounted the possibility of more than seven rate hikes in 2022 as inflationary pressures spread, and they see an approximately 66% probability that the Fed will raise rates by half a point next month.
The consumer price index soared by 7.9% in February, the highest number since 1982. The Fed's 2% inflation target is based on a separate measure, the Personal Consumption Expenditure Price Index, which rose by 6.4% in the 12 months to February. Meanwhile, U.S. labor markets remain strong and the unemployment rate fell to 3.6% last month, while employers added 431,000 jobs.
Original Note:
Fed Officials Weigh Shrinking Balance Sheet by $95 Billion/Month
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