Federal Reserve officials put plans into action at their most recent meeting to start raising interest rates and dumping trillions of dollars of bonds on the central bank’s balance sheet, according to minutes released on Wednesday.
Some officials at the meeting expressed concerns about financial stability, saying that loose monetary policy could pose a significant risk.
They noted that a rate hike is likely to be on the way soon, and said unwinding the bond portfolio could be aggressive.
“Participants noted that given the current high level of Federal Reserve securities holdings, a significant reduction in the size of the balance sheet is likely to be appropriate,” the meeting summary stated.
The Federal Open Market Committee on Policy decided after the two-day session that it will not raise rates yet but strongly indicated that a hike is on the way as soon as March.
Despite the tone that sounds tough, Stocks shaved losses after issuing the report.
“The market correctly interpreted it as pessimistic relative to the outlook,” said Simona Mokota, chief economist at State Street Global Advisors. “Honestly, I would call it anti-climate.”
Markets have been on alert for the past several weeks as high inflation and upbeat talk from some Federal Reserve officials, notably St. Louis Fed President James Bullard, caused traders to seek the equivalent of seven 0.25 percentage point rise this year. Market prices pulled back a bit after the minutes were released, with now a 50-50 chance of the Fed raising its benchmark rate by 1.75 percentage points.
“There’s been so much noise lately that I think everyone has prepared for a very tough tone in the minutes, and the minutes have been like, ‘We’ll do that, of course, but we’ll walk before we run,'” Mukuta said. “It seems enough for the Fed to make four hikes. Talk about the hawkish talk, tell everyone we’re watching this closely, and if we need to do more, we can do more.”
In addition to talking about prices, the committee laid out procedures for how it could begin to resolve its $9 trillion balance sheet, which consists largely of the bonds it has bought in an effort to lower rates and stimulate growth.
March is also the month when the asset purchase program is ending, although some members at the meeting were hoping for a quicker conclusion. Instead, the committee set a path in which the Fed would buy $20 billion in Treasuries over the next month and nearly $30 billion in mortgage-backed securities.
“Two of the participants stated that they would prefer to end the committee’s net asset purchases sooner to send a stronger signal that the committee is committed to lowering inflation,” the minutes said.
Members discussed how the balance sheet reduction would happen. The most likely path is to allow some of the proceeds from maturing bonds to roll in each month rather than reinvest them. However, some officials said it might be necessary to sell the mortgages outright in an effort to have the balance sheet kept purely treasury.
Since the meeting, new inflation readings have shown prices rising at the fastest pace in 40 years. The Fed is targeting inflation to around 2%, and officials have acknowledged that policy needs to be tightened to bring rates down.
Inflation occupied a large part of the discussion during the meeting, according to the minutes. The term was mentioned 73 times in the summary, with members saying the price increases were stronger and more consistent than they expected.
“Participants noted that recent inflation readings continued to significantly exceed the committee’s long-term target and that high inflation persists for longer than they had anticipated, reflecting supply and demand imbalances related to the pandemic and reopening of the economy,” the document stated.
FOMC members noted that inflation is beginning to spread out of the sectors affected by the pandemic and into the broader economy.
“Participants acknowledged that high inflation was a burden on American households, especially those who were least able to pay higher prices for essential goods and services,” the minutes said.
There was also a discussion about financial stability. Officials note that the risks come from rising asset prices as well as rapid increases in the price of crypto assets.
“Wannabe music enthusiast. Professional creator. Amateur food fanatic. Freelance pop culture maven.”