By Yasin Ebrahim
Investment.com – Federal Reserve officials discussed the prospect of accelerating the pace of monetary policy tightening including the central bank’s plan to cut the size of its balance sheet after its May meeting, Fed’s March meeting showed on Wednesday.
“[P]The participants agreed that they had made significant progress on the plan and that the Commission was ready to begin the process of reducing the balance sheet size as early as after the end of the upcoming meeting. in May”, according to the Fed minutes.
The minutes also detailed the scale and pace of the balance reduction, which will be implemented in phases over a modest three-month period or longer.
Under the plan, the lender would allow about $60 billion in Treasury securities and about $35 billion in the MBS agency to move to its balance sheet, which currently stands at nearly $9 trillion.
The scale of the balance sheet cut at $95 billion a month is significantly larger than it was at the start of the previous balance sheet reduction program in 2018.
In the Fed’s previous balance sheet reduction program, the central bank allowed about $10 billion in securities per month – $6 billion a month in Treasury securities and $4 billion in securities. secured mortgage every month – to finalize his balance sheet, aim to gradually speed up the process.
But as the flow rate hit $50 billion a month, the central bank was forced to halt the process at the end of 2019 after the key short-term overnight lending rate, which supports the financial system, rose. spike and pose a risk to the stability of the funding market.
Still, the Fed appeared keen to avoid a repeat of the fury seen in previous tightening cycles, with members agreeing that “it would be appropriate to first slow and then stop the decline in the size of the Fed.” balance sheet when the balance of reserves is above what the Commission considers appropriate for abundant reserves.”
At the end of its previous meeting on March 16, the Federal Open Market Committee, the Fed’s rate-setting body, raised the rate to a range of 0.25% to 0.5%.
The Fed’s decision in March was also accompanied by several projections on the path of economic growth, inflation and unemployment.
But it was the central bank’s estimates of rate hikes that surprised many. Fed members appear to have backed six rate hikes for 2022, forecasting the benchmark interest rate to rise to 1.9% by year-end.
The minutes revealed that many “participants … would prefer a 50 basis point increase in the target range” at the March meeting, citing increased risks to inflation. But ultimately opted for a 25 basis point increase, pointing to “greater near-term uncertainty regarding Russia’s invasion of Ukraine.”
However, the prospect of one of more than 50 basis point rate hikes at the upcoming meetings remains as inflation shows no sign of abating.
The Federal Reserve’s personal consumption expenditures (PCE) price index, which excludes food and energy, rose 5.4% in the 12 months to March, its fastest gain since April. 1983.
About 80% of traders expect the Fed to raise rates by 50 basis points at its May meeting, according to Investor.com.