Fed minutes reveal plans to shrink balance sheet by $95 billion a month

Federal Reserve officials have agreed to reduce the central bank’s balance sheet by up to $95 billion each month, minutes of the Federal Open Market Committee’s March meeting showed on Wednesday.

In March, Fed officials raised the target for overnight lending and interest paid on reserves by a quarter of a percentage point, to a range of 0.25 to 0.5%. Minutes released Wednesday revealed previously undisclosed details of the Fed’s plans to reduce its huge stockpile of bonds.

Minutes say Fed officials considered a 50 basis point hike at the March meeting, but withheld it due to uncertainty created by the invasion of Ukraine by Russia.

“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.

The minutes were anticipated by remarks this week from several Fed officials that seemed to indicate a more aggressive stance against inflation. Even notorious Fed doves, such as Fed Governor Lael Brainard and San Francisco Fed Chair Mary Daly, signaled support for a quicker tightening of monetary policy this week.

The minutes indicate that some FOMC members pushed for an uncapped run off of the Fed’s balance sheet. Others wanted “relatively high” limits on how quickly the toll will be reduced. There was no indication that any members thought the agreed $95 billion was too quick.

The Fed built up a giant stockpile of Treasuries and mortgage-backed securities in the aftermath of the 2008 financial crisis. It briefly began to reduce the size of its holdings in the early years of the Trump administration, to reverse the trend when the pandemic hit. The Fed now plans to shrink the balance sheet by not reinvesting all proceeds from maturing bonds. He has no intention of selling the bonds he owns.

The Fed currently holds about $9 trillion in bonds, equivalent to 42% of US GDP. At a rate of $95 billion a month, it would take the Fed about eight years to reduce its balance sheet to pre-crisis levels.

Yields on Treasuries rose after the announcement, indicating that investors were selling bonds at lower prices. The 10-year Treasury yield rose to 2.62%, the highest yield since the pandemic hit. The yield on two-year Treasury bills rose to 2.512%.

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