Federal Reserve Officials have spelled their plans for pruning the balance sheet by $1.1. Trillion a year and hiking interest rates expeditiously to counter the record inflation in four decades.
More on the balance sheet pruning
During the pandemic, the roadmap for reducing the assets was placed. On Wednesday, the plan was spelled out while setting the march meeting minutes, where a quarter-point hiked the interest rates. The plan to go bigger was replaced with caution in light of the uncertainty of Ukraine’s invasion by Russia.
As per Bloomberg News, many others who attended the Federal Open Market Committee meeting saw more than one half-point increase as appropriate if price pressures do not ease shortly.
According to analysts, the officials feel they should have acted earlier against inflation. Now they are in a hurry to get their primary rate, which is 0.25% to 0.5%, to neutral, which is a theoretical level that ensures the economy neither speeds up nor slows down.
The effort to prune the balance sheet will see a sharp pivot help to fight inflation as the Fed was seen buying bonds until the last month to wind down support for the pandemic smoothly. The FOMC is expected to approve in their next meeting on May 3-5.
A staff presentation to officials revealed the plan to shrink the Fed’s Balance Sheet at the maximum pace of $60 billion per month in treasuries and $35 billion in securities backed by mortgages. This is aligned with market expectations and double the $50 billion a month that Fed rimmed the balance sheet from 2017 to 2019.
The closed-door meeting minutes show there was plenty of support among the 16 officials who participated in raising interest rates by 50 basis points. The participants noted that a couple of 50 basis point hikes in the target range would be proper when inflation pressure remains intensified or elevated.
The neutral rate as per median estimates is around 2.4% as per data released at the meeting. The meeting minutes also said that officials feel a tighter policy may be warranted depending on the financial and economic development.
After Russia’s invasion of Ukraine sent the energy and food prices soaring, the Fed said that they would move more rapidly on policy, with Chair Powell declaring in their March 21 meeting another half-point increase was on the cards if required in May.
The Futures market is factoring in the probability of a half-point hike next month. The balance sheet reduction impact on financial conditions will be observed very carefully in the second half of 2022.
If Russia’s invasion of Ukraine sustains the high energy and food prices for enough time, then a bigger round of price wage hikes will pose a challenge to the Fed policy.
