June 27, 2022

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Fed Officials Weigh Pruning Balance Sheet by $95 Billion a Month

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(Bloomberg) — The Federal Reserve signaled it will reduce its massive bond holdings at a maximum pace of $95 billion a month, further tightening credit across the economy as the central bank raises interest rates to cool the hottest inflation in four decades.

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Minutes of their March meeting released Wednesday also showed that “many” officials would have favored raising rates by a half-percentage point last month — but deferred to a quarter-point move in light of Russia’s invasion of Ukraine — and viewed one or more half-point increases as possibly appropriate going forward if price pressures fail to moderate.

They proposed shrinking the Fed’s balance sheet at a maximum monthly pace of $60 billion in Treasuries and $35 billion in mortgage-backed securities, which is nearly double the peak rate of $50 billion a month the last time the Fed trimmed its balance sheet from 2017 to 2019.

“Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant,” minutes of the March 15-16 Federal Open Market Committee meeting said.

May Meeting

The FOMC is expected to approve the balance-sheet reduction at its next gathering May 3-4. The roadmap for shrinking the balance sheet came via a staff presentation to officials.

“Participants agreed they had made substantial progress on the plan and that the Committee was well placed to begin the process of reducing the size of the balance sheet as early as after the conclusion of its upcoming meeting in May,” the minutes said.

Long-term Treasury yields oscillated as investors digested the minutes, with the gap between 2- and 10-year yields extending a steepening move on the day. The S&P 500 index pared losses.

The move to reduce the balance sheet will extend a sharp pivot toward fighting inflation, as the Fed was buying bonds as recently as last month as it attempted a smooth wind-down of pandemic…

2022-04-06 14:46:30

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