Economic Buzz: Fed Minutes Indicate Plans To Reduce Size Of Balance Sheet

7 Apr 2022 , 08:21 AM

The minutes of the Federal Reserve March meeting featured a continued discussion about reducing the size of the Feds balance sheet, which has swelled to about $9 trillion due to the central banks recently concluded asset purchase program. The Fed said participants generally agreed reducing the central banks 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 Feds 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. 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 Feds 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 Russias 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.

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