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

Minutes from the Federal Reserve’s March meeting showed central bankers preparing to trim their bond holdings imminently while raising interest rates “rapidly”, two policies that will make money more expensive to borrow and spend.

The Fed is trying to calm a hot economy, hoping to rein in inflation, which is unfolding at the fastest pace in four decades.

Central bankers raised interest rates by a quarter of a percentage point in March, their first increase since 2018 – and the minutes showed that “many” officials would have preferred an even bigger rate hike and did not were blocked only by the uncertainty linked to the invasion of Ukraine by Russia. . Markets now expect the Fed to hike half a point in May and possibly June, even as it begins to withdraw further support from the economy by shrinking its balance sheet.

The balance sheet stands at nearly $9 trillion — bloated by their pandemic response policies — and Fed officials plan to reduce it by allowing some of their government-guaranteed bonds to expire. This will drive up longer-term interest rates, which will help make mortgages and other types of borrowing more expensive. Higher rates could temper consumption and business investment, leading to slower growth, more subdued hiring and weaker wage increases. Eventually, the chain reaction should help reduce price increases.

Fed officials “expected that it would be appropriate to begin this process at a future meeting, possibly as early as May,” according to the minutes.

Fed officials are trying to calm the economy at a time when it is growing rapidly and the labor market is rapidly improving. Employers added 431,000 jobs in March, wages are rising rapidly and the unemployment rate is around the 50-year low that prevailed before the pandemic.

Central bankers hope that the strength of the labor market will help them slow the economy without tipping it into a full recession. That will be a challenge, given the brutal policy tools of the Fed, a reality officials have acknowledged.

At the same time, Fed officials worry that if they don’t react vigorously to high inflation, consumers and businesses could expect consistently higher prices. This could perpetuate rapid price increases and make controlling them even more difficult.

“It’s of paramount importance to get inflation down,” said Lael Brainard, Fed governor who is the central bank’s vice-presidential nominee, on Tuesday. “As a result, the Committee will continue the methodical tightening of monetary policy through a series of interest rate hikes and beginning to reduce the balance sheet at a rapid pace as soon as we meet in May.”

Ms Brainard’s statement that the balance sheet contraction could occur “quickly” took markets by surprise, sending stocks lower and bond rates higher. Investors also focused their attention on Wednesday’s minutes.

Meeting notes provided more details on what the reduction process might look like. Fed officials are coalescing around a plan to allow the balance sheet to shrink by slowing their reinvestment in securities, the minutes show, most likely capping the monthly runoff at $60 billion a month for securities from the Treasury and $35 billion a month for mortgage-backed debt.

That would be about double the maximum pace set by the Fed when it reduced its balance sheet between 2017 and 2019, confirming the signal policymakers have given in recent weeks that the process could unfold much faster this time around. .

Officials “generally agreed that the caps could be phased in over a period of three months or slightly longer if market conditions warrant,” the minutes showed, while outright sales of asset-backed securities mortgages could be considered “after the balance sheet runoff is well underway.”

As well as confirming a relatively rapid pace of balance sheet reduction and reaffirming Ms. Brainard’s signal that balance sheet contraction could begin imminently, the minutes showed that “many ‘meeting attendees’ would have preferred a 50 basis point increase in the target range for the fed funds rate at this meeting.

Although they held back on an oversized increase amid uncertainty over Russia’s invasion of Ukraine, officials signaled that increases above a quarter-point could be appropriate if inflation remains elevated. .

“All participants stressed the need to remain alert to risks of further upward pressure on inflation and longer-term inflation expectations,” the minutes read.

And officials pointed to signs that the rapid price increases could last.

“Many participants indicated that their business contacts continued to report substantial increases in wages and input prices that were passed on to higher prices for their customers without any significant decrease in demand,” the minutes said.

Factors that Fed officials said could cause inflation to persist included “strong aggregate demand, significant increases in energy and commodity prices, and supply chain disruptions that would likely necessitate a long period of resolution,” according to the minutes.

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