Federal Reserve Officials Take The Cleaver To The Balance Sheet; ‘A lot’ is due to high interest rates

April 6 (Reuters) – Federal Reserve officials in March agreed “broadly” to slash up to $95 billion a month from central bank holdings as another tool in the fight against rising inflation, even as the war in Ukraine eased the first US war. interest rate increase.

The minutes of the Fed’s March 15-16 meeting showed deep concern among policymakers that inflation had widened across the economy, persuading them not only to raise the policy rate target by a quarter of a percentage point from its near-zero level but also “urgently” push it to “Neutral position” is estimated at 2.4%.

“Several” Fed officials have said they are ready to raise interest rates in half-percentage-point increases at upcoming policy meetings to try to control rates, even though heightened risks associated with the Ukraine war put them behind the record high in March, according to the minutes released on Wednesday. Read more

But they also moved ahead with plans to withdraw from major financial markets that have been benefiting from massive Federal Reserve support since March 2020, when the coronavirus pandemic prompted the central bank to buy trillions of dollars in Treasuries and mortgage-backed securities (MBS). ).).

After months of wrangling, policymakers rallied around a plan to reduce the Fed’s holdings of Treasuries as soon as next month by as much as $60 billion a month and MBS holdings by as much as $35 billion a month, with the amounts increasing in phases. Three months or a little longer, depending on the minutes.

The pace of the planned balance sheet summary, which should have the effect of increasing long-term interest rates, is roughly double the pace of the Fed’s “quantitative tightening” from 2017 to 2019, and could also include MBS direct sales going forward. . . Minutes, he said.

“All participants agreed that high inflation and tightening labor market conditions called for the balance sheet to run off.”

Uneven balance sheet

Details of the balance sheet program included in the minutes are in line with analyst expectations, and set the stage for the start of work after the Federal Reserve’s May 3-4 policy meeting.

The Fed unveiled its bond-buying program in the spring of 2020, swelling its holdings of Treasuries and MBS from $3.8 trillion to $8.5 trillion.

US Treasury yields rose after the minutes were released, with the 10-year bond yield rising to 2.6%, while the dollar rose to its highest level since late May against a basket of currencies. Major US stock indexes closed the session sharply lower.

said Alan Lynch, president of Alan B., Ohio, referring to comments made by Fed Governor Lyle Brainard on Tuesday.

Brainard said at a Federal Reserve Conference in Minneapolis that she expects a combination of interest rate increases and a rapid run-down in the balance sheet to put US monetary policy in a “more neutral stance” later this year, with further tightening to follow as needed. Read more

(Covering) Howard Schneider Editing by Paul Simao

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