March Fed Minutes: ‘Many’ Officials in Favor of a Big Rate Increase

“It is of paramount importance to get inflation down,” Lael Brainard, a Fed governor who is the nominee to be the central bank’s vice chair, said on Tuesday. “Accordingly, the committee will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.”

Ms. Brainard’s statement that balance sheet shrinking could happen “rapidly” caught markets by surprise, sending stocks lower and rates on bonds higher. Investors also focused their attention on the minutes released on Wednesday.

The notes from the March meeting provided more details about what the balance sheet process might look like. Fed officials are coalescing around a plan to slow their reinvestment of securities, the minutes showed, most likely capping the monthly shrinking at $60 billion for Treasury securities and $35 billion for mortgage-backed debt.

That would be about twice the maximum pace the Fed set when it shrank its balance sheet between 2017 and 2019, confirming the signal policymakers have been giving in recent weeks that the plan could proceed much more quickly this time around.

Officials “generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant,” the minutes showed, while outright sales of mortgage-backed securities might be up for consideration “after balance sheet runoff was well underway.”

Besides confirming a relatively quick pace of balance sheet drawdown and reaffirming Ms. Brainard’s signal that balance sheet shrinking could begin imminently, the minutes showed that “many” meeting participants “would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting.”

While they held off on a bigger increase while faced with uncertainty tied to Russia’s invasion of Ukraine, officials signaled that increases above a quarter-point could be appropriate if inflation remained elevated.

Article source: https://www.nytimes.com/2022/04/06/business/economy/fed-minutes-march-2022.html