News guidance: The recent minutes of the central bank policy meeting, which ended on March 16, show a strong internal consensus that the Fed needs to move faster than ever before to strengthen monetary policy and fight inflation.
“Participants felt that it would be appropriate to quickly shift the monetary policy stance to a neutral stance,” the minutes said.
In particular, the Fed seeks to reverse its “quantitative easing” policies that stimulated the economy during the pandemic, as the Fed amassed a $ 9 trillion portfolio. It will do so by “quantifying” or allowing the portfolio to shrink by not replacing maturing securities.
According to the minutes, the participants “generally agreed” to allow Treasury bills of up to $ 60 billion and $ 35 billion in mortgage-backed securities to run each month. They gradually envisioned the tightening program over a period of three months, “or a little longer” if market conditions justify it. This process could start after a meeting that ends on May 4th.
The bond market sold out this week, sending interest rates higher, amid expectations that the Fed will shrink its balance sheet much faster than in the latest round of so-called “quantitative easing” that began in 2017.
At that time, the central bank gradually introduced the policy and reduced its holdings by $ 50 billion a month. Thus, this QT program will be almost twice as fast and will reduce the total size of the Fed balance sheet by up to $ 1.14 trillion per year, if maintained.
The minutes also confirm that many officials envision raising interest rates by half a percentage point in future policy meetings.
Some of the officials believed that there was a significant risk that inflation would stabilize “if the public began to question the Commission’s determination to adjust its policy stance”.
The bottom line: If there is still doubt that the Fed will withdraw its monetary stimulus faster than in the past, the last few minutes will remove it.
