Fed minutes reveal discussions of accelerated balance sheet reduction

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(RTTNews) – Members of the Federal Reserve are gearing up to start shrinking the size of the central bank’s balance sheet soon after raising interest rates, minutes from the Federal Open Market Committee’s latest meeting have revealed.

Minutes of the Dec. 14-15 meeting, released Wednesday, showed attendees had initial discussions about appropriate terms and timing to reduce the portfolio of about $8.8 trillion of Treasuries. and Fed mortgage securities.

While the previous balance sheet liquidation exercise began almost two years after the policy rate hike, participants believe that the appropriate timing this time around would likely be closer to the policy rate hike.

“They noted that current conditions included a stronger economic outlook, higher inflation and a stronger balance sheet and could therefore warrant a potentially faster pace of policy rate normalization,” the minutes read.

The minutes noted that many participants also felt that the appropriate pace of balance sheet liquidation would likely be faster than it was during the previous normalization episode.

Talk of shrinking the size of the central bank’s balance sheet came as the Fed also agreed to accelerate the pace of reductions in its asset purchases, with the program currently set to end in mid-March.

Many economists expect the Fed to start raising interest rates as soon as the asset program ends, with CME’s FedWatch tool currently indicating a 71.0% chance of a rate hike when of the March 15 and 16 meeting.

The minutes noted that participants generally agreed that there might be merit in raising rates sooner or at a faster rate previously planned given the outlook for the economy, labor market and the economy. inflation.

“Some participants felt that a less dovish future stance of policy would likely be warranted and that the Committee should make a strong commitment to deal with elevated inflationary pressures,” the minutes read.

The Fed added: “These participants noted, however, that a measured approach to tightening policy would help the Committee assess incoming data and be able to react to the plausible economic outcome package.”

Commenting on the minutes, Paul Ashworth, chief US economist at Capital Economics, said it made sense that quantitative tightening would be faster this time around, as the balance sheet is much larger than the previous peak and conditions much stronger economy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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