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All FOMC members are in agreement that the Federal Reserve will have to
adopt a faster pace in shrinking its balance sheet than it conducted
during the 2017-'19 period. "Participants generally agreed that monthly
caps of about $60B for Treasury securities and about $35B for agency MBS
would likely be appropriate," per the minutes from March 15-16
gathering. That means the Fed could trim its roughly $9T balance sheet
by more than $1T per year, while hiking rates "expeditiously" to fight
the hottest inflation since the early 1980s.
Bigger picture:
The process for reducing the balance sheet could start as early as next
month. "Participants also generally agreed that the caps could be
phased in over a period of three months or modestly longer if market
conditions warrant," the minutes revealed, though some FOMC officials
said they'd be comfortable with "relatively high monthly caps or no
caps." They also reaffirmed that the balance sheet reduction should be
done "over time in a predictable manner primarily by adjusting the
amounts reinvested of principal payments received from securities."
Meanwhile,
many participants preferred a 50-basis-point interest rate increase at
the meeting in March, but a number of them judged that a 25-bp hike
"would be more appropriate" due to the greater near-term uncertainty
resulting from Russia's invasion of Ukraine. "Many" of the FOMC members
also said one 50 bps rate hike or more could be warranted if
inflationary pressures stay high or intensify. U.S. equities slid for
the second straight session on Wednesday amid fears that aggressive
tightening could hurt economic growth or lead to a recession.
Price pressures:
A few of the officials even saw a "significant risk" that elevated
inflation and inflation expectations could become entrenched if the
public isn't convinced of the committee's determination to adjust policy
to control inflation. They argued that "expediting the removal of
policy accommodation" would reduce the risk and that would leave the
committee "well positioned to adjust the stance of policy if
geopolitical and other developments led to a more rapid dissipation of
demand pressures than expected." To give an indication of how prominent
inflation was in their discussion, the word appeared 83 times in the
minutes, up from 73 mentions in the January meeting and 75 references
flagged during the get-together in December 2021
