Fed Minutes from March 2022 Meetings:

Federal Reserve officials discussed how to reduce their trillions in bond holdings by a consensus amount of around $95 billion at their March meeting, minutes released Wednesday showed.

Officials were “generally agreed” that a limit of $60 billion in government bonds and $35 billion in mortgage-backed securities should be phased out over a three-month period.

At the meeting, the Fed approved its first rate hike in more than three years. The 25 basis point hike — a quarter of a percentage point — lifted the benchmark short-term lending rate from near-zero levels since March 2020.

In addition to the balance sheet talks, officials also discussed the pace of upcoming rate hikes, with members leaning toward more aggressive moves.

That means potential rate hikes of 50 basis points in upcoming meetings, a level consistent with market prices for the May vote. In fact, there has been considerable bullish sentiment over the past month.

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

Uncertainty over the war in Ukraine deterred some officials from taking the 50 basis point move.

However, the Fed’s relative hawkishness also extended to the balance sheet talks. Some members didn’t want caps on monthly outflow levels, while others said they were fine with “relatively high” limits.

The balance sheet rundown will result in the Fed withdrawing a limited amount of proceeds from maturing securities each month while reinvesting the remainder. Holdings of shorter-dated Treasury bills would be targeted because they are “highly valued by the private sector as safe and liquid assets.”

While officials did not hold formal votes, minutes suggested members agreed the trial could begin in May.

Stocks fell after the Fed’s release while Treasury yields stayed higher.

Also at the meeting, Fed officials significantly raised their inflation outlook and lowered their expectations for economic growth. Rising inflation is the driving factor behind the central bank’s tightening.

Markets searched the minutes release for details on where monetary policy is headed from here. Notably, Fed Chair Jerome Powell said in his post-meeting press briefing that the minutes would detail the balance sheet shrinking considerations.

The Fed increased its holdings to about $9 trillion, or more than doubled, as part of monthly bond purchases amid the pandemic crisis. Those purchases ended just a month ago, despite signs of runaway inflation higher than anything the US had seen since the early 1980s, a surge that then-Chairman Paul Volcker curbed by dragging the economy into recession .

Policymakers have become increasingly explicit in their views on how to tame inflation in recent days.

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

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