U.S. Fed plans to shrink balance sheet by 95 bln USD a month: minutes
Washington (US), April 7: U.S. Federal Reserve could begin reducing the size of its balance sheet as soon as May, with officials signaling their support for a monthly caps of 95 billion U.S. dollars, according to the minutes of the Fed's latest policy meeting released Wednesday.
Many participants noted that they would have preferred a 50 basis point increase in the target range for the federal funds rate at the March meeting, but a number of these participants indicated that in light of the uncertainty amid the Russia-Ukraine conflict, they judged that a 25 basis point hike would be appropriate.
"Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified," the minutes showed.
As the central bank raises interest rates to cool the surging inflation, participants agreed that reducing the size of the Fed's balance sheet "would play an important role in firming the stance of monetary policy."
"All participants agreed that elevated inflation and tight labor market conditions warranted commencement of balance sheet runoff at a coming meeting, with a faster pace of decline in securities holdings than over the 2017-19 period," the minutes showed, noting that this process could begin as soon as May."
Participants generally agreed that monthly caps of about 60 billion dollars for Treasury securities and about 35 billion dollars for agency mortgage-backed security (MBS) would likely be appropriate, according to the minutes.
"Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant," the minutes said.
When trimming balance sheet, the Fed would allow a capped level of proceeds from maturing securities to roll off each month while reinvesting the rest. From 2017 to 2019, the Fed reduced its balance sheet at a peak rate of 50 billion dollars a month.
The central bank aggressively bought bonds to create more liquidity in the market in the wake of the COVID-19 crisis, and the purchases ended only a month ago. Now the Fed's balance sheet has swelled to nearly 9 trillion U.S. dollars, or more than doubled from two years ago.
The minutes was released one day after U.S. Federal Reserve Governor Lael Brainard said she expected the balance sheet to shrink considerably more rapidly than in the previous recovery.
Brainard, President Joe Biden's nominee to serve as the central bank's vice chair, said it is "of paramount importance" to get inflation down, noting that the central bank is "prepared to take stronger action" if inflation indicators show such action is warranted.
At its March meeting, the Fed raised its benchmark interest rate by a quarter percentage point to a range of 0.25 percent to 0.5 percent from near zero, marking its first rate hike since 2018 and a major step in exiting from the ultra-loose monetary policy enacted at the start of the pandemic.