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Fed Members Eye Larger Rate Hikes, Balance Sheet Reduction: Minutes

Economy Apr 06, 2022 02:34PM ET
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© Reuters.

By Yasin Ebrahim

Investing.com -- Federal Reserve officials discussed the prospect of stepping up the pace of monetary policy tightening including plans to cut the size of the central bank’s balance sheet after the May meeting, the Fed’s March meeting minutes showed Wednesday. 

"[P]articipants agreed they had made substantial progress on the plan and that the Committee was well placed to begin the process of reducing the size of the balance sheet as early as after the conclusion of its upcoming meeting in May," according to the Fed minutes. 

The minutes also detailed plans about the size and pace of balance reduction, which will be phased-in over the course of three months or modestly longer. 

Under the plan, the fed would allow about $60 billion in Treasury securities and about $35 billion in agency MBS to roll off its balance sheet, which current stands at nearly $9 trillion. 

The size of balance sheet reduction at a size of $95 billion a month is significantly larger than 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 of securities a month - $6 billion a month in Treasury securities and $4 billion in mortgage-backed securities a month – to roll off its balance sheet, with a view to gradually speed up the process.      

But as the pace of the runoff reached $50 billion a month, the central bank was forced to stop the process in late 2019 after a key short-term overnight lending rate, which supports the plumbing of the financial system, jumped and risked the stability of funding markets. 

The Fed, however, appears keen to avoid a repeat of taper tantrum prevalent in the previous tightening cycle, with members agreeing that it "would be appropriate to first slow and then stop the decline in the size of the balance sheet when reserve balances were above the level the Committee judged to be consistent with ample reserves."

At the conclusion of its previous meeting on Mar. 16, the Federal Open Market Committee, the Fed's rate-setting arm, raised its benchmark rate to a range of 0.25% to 0.5%.

The Fed’s decision in March was also accompanied with several projections on the path of economic growth, inflation, and unemployment. 

But it was the central bank’s estimates on rate hikes that caught many by surprise. Fed members seemingly backed six rate hikes for 2022, forecasting the benchmark rate to rise to 1.9% by year-end. 

The minutes revealed that many "participants ... would have preferred a 50 basis point increase in the target range" at the March meeting, citing the upsides risks to inflation. But ultimately opted for a 25 basis point hike, pointing to "greater near-term uncertainty associated with Russia's invasion of Ukraine."

Still, the prospect of one of more 50 basis points rate hikes at upcoming meetings remains on the table as inflation hasn't shown any sign of abating. 

The Federal Reserve's preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, rose 5.4% in the 12 months through March, the fastest gain since April 1983.

About 80% of traders expect the Fed to hike rates by 50 basis points at its May meeting, according to Investing.com's Fed Rate Monitor Tool. 

Fed Members Eye Larger Rate Hikes, Balance Sheet Reduction: Minutes
 

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Comments (19)
Elezabeth Thomas
Elezabeth Thomas Apr 07, 2022 2:19PM ET
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It's a total mess!!
William Smith
William Smith Apr 07, 2022 12:38PM ET
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These cl (ow) ns have been talking about shrinking the balance sheet since 2012. Who will finance the US ballooning debt? Will need interest rates around 10% to stop inflation and finance the debt, except at 10% our debt interest explodes to $2 trillion a year. Can you say depression.
Dave Jones
Dave Jones Apr 07, 2022 2:19AM ET
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You're dreaming. Who you trying to kid?
Marco cuevas
Marco cuevas Apr 06, 2022 5:13PM ET
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Fed members busy buying the right PUTS (manipulation)
Erikke Evans
Erikke Apr 06, 2022 3:51PM ET
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95 Bil? Peanuts. Behind the curve...too little too late.
Roger Miller
Roger Miller Apr 06, 2022 3:25PM ET
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I think they've widened the wealth gap enough.
Srikanth Sampati
Srikanth Sampati Apr 06, 2022 3:19PM ET
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They are better than Staples print service but not much when comes to controlling
Avijit Maji
Avijit Maji Apr 06, 2022 2:58PM ET
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market goes up right now
Dion Argueta
Dion Argueta Apr 06, 2022 2:51PM ET
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BY raising interest rates they are just amplifying the price increase effect on food and gas prices and transportation of goods etc. Pure Foolery !!!! Data Driven needs to have some judgement calls as well ??? Stupidity at it's finest !!!!!
Roger Miller
Roger Miller Apr 06, 2022 2:51PM ET
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That's exactly what Turkey's Erdogan believes to.  Rates are lowered and kept low by printing money, which also has the effect of making each dollar worth less.
First Last
First Last Apr 06, 2022 2:51PM ET
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Roger Miller   It just might be a good idea for the US to not take the lead from the despot of a theocracy.
York Regent
York Regent Apr 06, 2022 2:45PM ET
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Trump was right but the irony is that FED is controlled by the Rothschilds and their partners. U.S govt. has no control over it.
Roger Miller
Roger Miller Apr 06, 2022 2:45PM ET
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They do have control over it, it's entire existence rests on government legislation.
William Smith
William Smith Apr 06, 2022 2:45PM ET
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Roger Miller Roger, you've drank the kool aide.
 
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