Fed minutes from March 2022 meetings:

Federal Reserve officials discussed how they wanted to cut their trillion bonds at their March meeting, with a consensus amount of about $95 billion, according to minutes released Wednesday.

Officials “generally agreed” that a limit of $60 billion in treasury bills and $35 billion in mortgage-backed securities would be allowed to be removed, phased in over three months.

At the meeting, the Fed approved its first interest rate hike in more than three years. The 25 basis point increase – a quarter of a percentage point – lifted the benchmark short-term borrowing rate from near zero where it has been since March 2020.

In addition to the balance sheet discussion, officials also discussed the pace of future interest rate hikes, with members leaning towards more aggressive measures.

That means potential rate hikes of 50 basis points in future meetings, a level consistent with market prices for the May vote. In fact, there was considerable sentiment going higher last month.

“Many participants noted that – with inflation well above the Committee’s target, inflationary risks on the upside, and a federal funds rate well below participants’ estimates of its longer-term level – they would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting,” the minutes read.

Uncertainty surrounding the war in Ukraine has deterred some officials from opting for the 50 basis point move.

However, the Fed’s relative hawkishness spilled over into balance sheet discussions. Some members didn’t want caps on the amount of monthly trickle, while others said they were fine with “relatively high” limits.

The balance sheet overview will see the Fed allow a capped level of proceeds from maturing securities to roll over each month while reinvesting the rest. Holdings of shorter-dated Treasury bills would be targeted because they are “highly valued as safe and liquid assets by the private sector”.

Although officials did not take any formal votes, the minutes said members had agreed the process could begin in May.

Stocks fell after the Fed statement, while government bond yields held higher.

Also at the meeting, Fed officials also sharply raised their inflation outlook and lowered their forecast for economic growth. Soaring inflation is the driving factor behind central bank tightening.

Markets were watching the release of the minutes for details on where monetary policy will go from here. Specifically, Fed Chairman Jerome Powell said in his post-meeting press conference that the minutes would provide details on the balance sheet reduction thinking.

The Fed increased its holdings to about $9 trillion, more than double, in monthly bond purchases in the wake of the pandemic crisis. Those purchases ended only a month ago, despite evidence of runaway inflation higher than anything the United States had seen since the early 1980s, a surge that then-President Paul Volcker, suppressed by dragging the economy into a recession.

In recent days, policymakers have become increasingly strident in their views on controlling inflation.

Gov. Lael Brainard said Tuesday that lower prices will require a combination of steady increases and aggressive balance sheet reduction. Markets expect the Fed to hike rates a total of 250 basis points this year.

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