March Fed minutes: ‘Many’ officials favor a big rate hike

Within minutes of the Federal Reserve’s March meeting, central bankers were preparing to shrink their portfolio of bond holdings while raising interest rates “rapidly” as the central bank sought to cool the economy and accelerate inflation.

Fed officials are spending more money on borrowing and spending to slow down purchases and business investments, in the hope that weak demand will help control prices, which are now rising rapidly in four decades.

Central bankers raised interest rates by a quarter of a percentage point in March, their first increase since 2018 – and the minutes show that “many” executives preferred a larger rate move and were left behind only by the uncertainty surrounding the Russian invasion. Ukraine. Markets now expect the Fed to raise half-points in May and possibly June, even as they begin to withdraw additional support from the economy by shrinking their balance sheets.

The balance sheet stands at about $ 9 trillion – inflated by the epidemic response policy – and Fed officials plan to shrink it by allowing some of their government-backed bond holdings to expire in May, the minutes show. This will help raise interest rates further, potentially leading to slower growth, more silent recruitment and weaker wage growth. Finally, as the theory goes, the chain reaction should help slow inflation. “They are very determined to fight inflation and reduce it,” said Kathy Bostjansic, chief economist at Oxford Economics. “They’re worried.”

Although central bankers were reluctant to respond to inflation quickly last year, expecting it to prove “temporary” and fade quickly, those expectations have been dashed. Prices are rising rapidly, and officials are cautiously noticing that they may become more stable.

“All participants stressed the need to focus on further upward pressure on inflation and the risk of long-term inflation expectations,” the minutes show.

Now, officials are trying to cool the economy because it is growing fast and the job market is improving rapidly. Employers added 431,000 jobs in March, wages rose sharply, and the unemployment rate matched the 50-year low that existed before the epidemic.

Central bankers are hoping that a strong job market will help their economy slow down rather than lead to a direct recession. That would be a challenge, given the Fed’s blunt policy tools, a reality that officials have acknowledged.

At the same time, Fed officials are concerned that if they do not respond strongly to high inflation, consumers and businesses may expect continued high prices. This can perpetuate rapid price increases and make wrestling under their control even more painful.

“This is most important for reducing inflation,” said Lael Brainard, a Fed governor who has been nominated by the central bank’s vice chair, on Tuesday. “Accordingly, the Committee will continue to systematically tighten monetary policy through a series of interest rate hikes and a rapid pace of reduction of the balance sheet as soon as we meet in May.”

Miss. Brainard’s statement that the balance sheet could shrink “quickly” surprised the market, sending stocks lower and bond rates higher. Investors also focused on the minutes released on Wednesday.

The March meeting notes provide more details about what the balance sheet process might look like. Fed officials are rallying around plans to slow their securities reinvestment, minutes show, possibly a monthly shrink of $ 60 billion for Treasury securities and $ 35 billion for mortgage-backed loans.

This will almost double the Fed’s maximum speed as it shrinks its balance sheet between 2017 and 2019, confirming that policymakers have been signaling in recent weeks that the plan could move even faster at this time.

Officials “generally agree that caps may be moderately longer within a period of three months or if market conditions are warranted,” the minutes show, while the full sale of mortgage-backed securities may be considered “after the balance sheet runoff improves”.

In addition to ensuring a relatively fast pace of balance sheet drawdowns and reassuring Miss Brenard’s signal that the balance sheet could begin to shrink immediately, the minutes show that “many” meeting participants “would prefer a 50 basis point increase in the federal funds target range.” . ”

Faced with uncertainty over Russia’s aggression in Ukraine, they halted a sharp rise, with officials hinting that an increase above a quarter point could be appropriate if inflation remains high.

And officials point to signs that rapid price increases could be permanent.

“Many participants indicated that their business contacts continued to report significant increases in wages and input costs that were passed on to their customers at higher prices without any significant reduction in demand,” the minutes show.

Among the reasons Fed officials thought inflation could survive were “strong overall demand, significant increases in energy and commodity prices, and supply chain disruptions that may take a long time to resolve,” Minute said.

After all, the minute discussion showed a growing nervousness about the pace and perseverance of price increases.

“The overall tone of the minute has shown considerable concern among policymakers about the reverse risk,” wrote Morgan Stanley’s economists in response to the minute, less annoyed with inflation and growth.

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