US Fed Sets Ball Rolling To Raise Rates And Shrink Balance Sheet Soon, Shows Minutes

Meeting expectations of the market and economists, the United States Federal Reserve set the ball rolling for a hike in interest rates and eliminating the trillions of dollars in bonds on the central bank balance sheet in the latest meeting of the officials of the central bank, said reports quoting information from minutes of the meeting on Wednesday.

At the meeting, some officials highlighted concerns about financial stability, claiming that lax monetary policy could pose a significant risk.

They warned that interest rate hikes are expected to come shortly and that the bond portfolio liquidation might be rapid.

“Participants observed that, in light of the current high level of the Federal Reserve’s securities holdings, a significant reduction in the size of the balance sheet would likely be appropriate,” the meeting summary stated.

After a two-day meeting, the Federal Open Market Committee agreed not to raise interest rates just yet but strongly hinted that a boost may come as soon as March.

Despite the hawkish tone, equities recovered some of their losses once the minutes were released.

“The market correctly interpreted them as dovish relative to expectations,” said Simona Mocuta, chief economist at State Street Global Advisors. “Frankly, I would call them anticlimactic.”

Markets have been on edge in recent weeks as traders priced in the equivalent of seven 0.25 percentage point rate hikes this year due to rising inflation and hawkish comments from some Fed officials, particularly St. Louis Fed President James Bullard. Following the release of the minutes, market pricing softened slightly, with a 50-50 likelihood that the Fed will raise its benchmark rate by 1.75 percentage points.

“There’s been so much hype recently that I think everybody was braced for a very hawkish tone in the minutes, and the minutes were more like, ‘We’ll do it, of course, but we’ll walk before we run,’” Mocuta said. “It seems enough for the Fed to do four hikes. Talk the hawkish talk, tell everybody that we are watching this closely, and if we need to do more we can do more.”

In addition to talking about rates, the committee laid out processes for unwinding its almost $9 trillion balance sheet, which is mostly made up of bonds it bought to lower rates and encourage the economy..

The asset purchase program is scheduled to expire in March, however, some attendees at the meeting hoped for a quicker conclusion. Instead, the Fed would acquire $20 billion in Treasurys and almost $30 billion in mortgage-backed securities over the next month, according to the committee.

“A couple of participants stated that they favored ending the Committee’s net asset purchases sooner to send an even stronger signal that the Committee was committed to bringing down inflation,” the minutes said.

Members debated how the balance sheet will be reduced. The most likely path is to allow some maturing bond proceeds to roll off each month instead of being reinvested. Some authorities, however, believe it may be essential to selling mortgages outright in order to reduce the balance sheet’s holdings to only Treasurys.

Prices have risen at the quickest rate in 40 years since the meeting, according to new inflation readings. The Fed wants inflation to average around 2%, and policymakers have admitted that tighter policy is needed to bring prices down.

According to the minutes, inflation was a major topic of discussion throughout the meeting.

The term appears 73 times in the report, with members stating that price rises have been stronger and longer-lasting than expected.

“Participants remarked that recent inflation readings had continued to significantly exceed the Committee’s longer-run goal and elevated inflation was persisting longer than they had anticipated, reflecting supply and demand imbalances related to the pandemic and the reopening of the economy,” the document stated.

Members of the FOMC recognized that inflation was spreading beyond the Covid pandemic’s afflicted industries and into the broader economy.

“Participants acknowledged that elevated inflation was a burden on U.S. households, particularly those who were least able to pay higher prices for essential goods and services,” the minutes said.

(Adapted from FXSteet.com)



Categories: Economy & Finance, Regulations & Legal, Strategy, Sustainability

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