Fed plan calls for shrinking balance sheet by $95B per month: FOMC minutes

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All Federal Open Market Committee members agreed that the Federal Reserve will have to adopt a faster pace in shrinking its balance sheet than it took over the 2017-'19 period, according to the March 15-16 FOMC meeting minutes released on Wednesday.

"Participants generally agreed that monthly caps of about $60B for Treasury securities and about $35B for agency MBS would likely be appropriate," the minutes said. Some of the officials, though, said they'd be comfortable with "relatively high monthly caps or no caps." The process for reducing the balance sheet could start as early as the May meeting, they said.

"Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant," according to the minutes.

They also reaffirmed that the balance sheet reduction should be done "over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities" held on its balance sheet.

Many participants said they preferred a 50-basis-point interest rate increase at the March meeting, but a number of them judged that a 25-bp hike "would be more appropriate" due to the greater near-term uncertainty resulting from Russia's invasion of Ukraine.

However, "many" of the FOMC members said one or more 50bp rate hikes could be warranted if inflationary pressures stay high or intensify.

A few of the officials saw a "significant risk" that elevated inflation and inflation expectations could become entrenched if the public isn't convinced of the committee's determination to adjust policy to control inflation. They argued that "expediting the removal of policy accommodation" would reduce the risk. That would leave the committee "well positioned to adjust the stance of policy if geopolitical and other developments led to a more rapid dissipation of demand pressures than expected," they said.

To give an indication of how prominent inflation was in their discussion, the word appeared 83 times in the minutes, up from 73 mentions in the January meeting and 75 times in the December 2021 meeting.

Recall that the central bank increased the federal funds rate target range by 25 basis points at the end of the meeting, the first rate hike since 2018.

On Tuesday, Fed Governor Lael Brainard said the central bank may start shrinking its almost $9T balance sheet as soon as May.