With concerns about the outlook for monetary policy weighing on Wall Street on Wednesday, the Federal Reserve has released the minutes of its March meeting.
The minutes showed that the meeting featured a continued discussion about reducing the size of the Fed’s balance sheet, which has swelled to about $9 trillion due to the central bank’s recently concluded asset purchase program.
Staff presented a range of possible options for reducing the Fed’s securities holdings over time in a predictable manner, with all of the options featuring a more rapid pace of balance sheet runoff than in 2017-2019.
The Fed said participants generally agreed reducing the central bank’s holdings by about $95 billion per month would likely be appropriate, reflecting monthly caps of about $60 billion for Treasury securities and about $35 billion for agency mortgage-backed securities.
The minutes showed that there was also general agreement that the caps could be phased in over a period of three months or modestly longer if market conditions warrant.
Participants agreed reducing the size of the Fed’s balance sheet would play an important role in firming the stance of monetary policy and that the process could begin as soon as the next meeting in May.
Paul Ashworth, Chief U.S. Economist at Capital Economics, noted the balance sheet reduction outlined in the minutes is double the pace of the run-off between 2017 and 2019 but said it is still a “little smaller than we were expecting, particularly in light of the more hawkish post-meeting comments from various officials.”
At the March meeting, the Fed announced its widely expected decision to raise interest by 25 basis points to a range of 0.25 to 0.5 percent, marking the first rate hike since December 2018.
The minutes showed many participants would have preferred a 50 basis point increase due to rate of inflation being well above the Fed’s objective and facing risks to the upside.
However, a number of these participants felt a 25 basis point increase would be appropriate in light of the greater near-term uncertainty associated with Russia’s invasion of Ukraine.
Many participants noted that one or more 50 basis point increases could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified, the Fed said.
The Fed’s next monetary policy meeting scheduled for May 3-4, with CME Group’s FedWatch Tool currently indicating a 78.8 percent chance of a 50 basis point rate hike.