March Fed minutes: ‘Many’ officials back big rate hike

Minutes from the March Federal Reserve meeting showed that central bankers were preparing to immediately reduce their portfolio of bond holdings while raising interest rates “quickly”, two measures that will make it more expensive to borrow and spend money.

The Fed is attempting to cool a hot economy in hopes of taming inflation, which is at its fastest in four decades.

Central bankers hiked interest rates by a quarter of a point in March, their first hike since 2018 – and the minutes showed that “many” officials would have preferred an even bigger rate hike, only faltered by uncertainty surrounding Russia’s invasion of Ukraine would be . Markets now expect the Fed to hike a half-point in May and possibly June, even as it begins withdrawing additional support from the economy by shrinking its balance sheet.

The balance sheet is nearly $9 trillion – swollen by its pandemic response policies – and Fed officials plan to shrink it by phasing out some of their government-backed bond holdings. That will push up longer-term interest rates and help make mortgages and other types of borrowing more expensive. Higher interest rates could dampen consumption and business investment, leading to slower growth, softer hiring and weaker wage increases. Ultimately, the chain reaction should help dampen price increases.

Fed officials “expected that it would be appropriate to start this process at an upcoming meeting, possibly as early as May,” the minutes read.

Fed officials are trying to cool the economy at a time when it’s growing fast and the job market is improving fast. Employers added 431,000 jobs in March, wages are rising rapidly and the unemployment rate is just touching a 50-year pre-pandemic low.

Central bankers are hoping the strong labor market will help them slow the economy without plunging it into an outright recession. Given the Fed’s blunt policy tools, this will be a challenge, a reality officials have acknowledged.

At the same time, Fed officials are concerned that consumers and businesses could expect persistently higher prices unless they act vigorously to address high inflation. That could perpetuate rapid price increases and make them even more painful to contain.

“It is of paramount importance to bring inflation down,” said Lael Brainard, Fed governor-nominated as central bank vice chair on Tuesday. “Accordingly, the committee will continue to methodically tighten monetary policy through a series of rate hikes and begin reducing the balance sheet at a rapid pace as early as our May meeting.”

Ms Brainard’s statement that balance sheet shrinking could happen “quickly” caught markets by surprise, causing stock prices to fall and bond interest rates to rise. Investors also turned their attention to Wednesday’s minutes.

The meeting notes included more details on what the shrinking process might look like. Fed officials are closing in on a plan to shrink the balance sheet by slowing its reinvestment of securities, the minutes showed, most likely reducing monthly outflows to $60 billion a month for Treasuries and $35 billion a month for mortgage-backed bonds limit debt.

That would be about double the maximum pace the Fed set when it shrunk its balance sheet between 2017 and 2019, and confirmed the signal policymakers have been giving in recent weeks that the process could move much faster this time.

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 mortgage-backed securities could be considered “after the balance well settled was in progress.”

In addition to confirming a relatively rapid balance sheet rundown and reaffirming Ms. Brainard’s signal that balance sheet shrinkage could begin immediately, the minutes showed that “many” meeting participants “would have preferred a 50 basis point increase in the target range for the federal appropriation rate at that meeting.” “

While holding back on an outsized hike amid uncertainty surrounding Russia’s invasion of Ukraine, officials signaled hikes above a quarter point could be appropriate if inflation remained high.

“All participants underlined the need to keep an eye on the risks of further upward pressure on inflation and longer-term inflation expectations,” the minutes read.

And officials pointed to signs that rapid price hikes could continue.

“Many participants indicated that their business contacts continued to report significant increases in wages and wholesale prices, which were passed on to their customers in higher prices without a significant drop in demand,” the minutes read.

Factors that Fed officials believed could cause persistent inflation included “strong aggregate demand, significant increases in energy and commodity prices, and supply chain disruptions that would likely take a long time to rectify.” , says the record.

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