Fed minutes show debate over higher rates, balance sheet

Federal Reserve officials envision shrinking their massive portfolio of bonds acquired during the pandemic at a rate of $ 95 billion a month, according to new minutes that show the central bank intends to move “expeditiously” from an era of ultra-easy money.

Driving the news: Newly released minutes of the central bank’s policy meeting that concluded March 16 show strong internal consensus that the Fed needs to move more quickly than it has in the past to tighten monetary policy and fight inflation.

  • “Participants judged that it would be appropriate to move the stance of monetary policy toward a neutral posture expeditiously,” the minutes said.

In particular, the Fed is looking to undo its “quantitative easing” policies that stimulated the economy during the pandemic as the Fed accumulated a $ 9 trillion portfolio. It will do so through “quantitative tightening,” or allowing the portfolio to shrink by not replacing securities that mature.

  • According to the minutes, participants “generally agreed” on allowing up to $ 60 billion of Treasury securities and $ 35 billion in mortgage-backed securities to run off each month.
  • They envisioned phasing in the tightening program over three months, “or modestly longer” if market conditions warrant. That process could begin following a meeting that concludes May 4.

The bond market has sold off this week, sending interest rates higher, on expectations that the Fed will be shrinking its balance sheet much more rapidly than it did in the last cycle of so-called “quantitative tightening,” which started in 2017.

  • Back then, the central bank phased in the policy gradually and reduced holdings by $ 50 billion per month. So this QT program will be nearly twice as rapid, and it would reduce the total size of the Fed balance sheet by up to $ 1.14 trillion per year, if sustained.

The minutes also confirm that many officials envision raising rates by a half-percentage point at future policy meetings.

  • A few of the officials believed there was significant risk that inflation could become entrenched “if the public began to question the Committee’s resolve to adjust the stance of policy.”

The bottom line: If there remained any doubt that the Fed will be withdrawing its monetary stimulus more rapidly than it has in the past, the last minutes remove it.

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