Representatives of the Federal Reserve launched plans at their last meeting to begin raising interest rates and rid trillion-dollar bonds on the central bank’s balance sheet, according to a report released on Wednesday.
Some officials at the meeting expressed concern about financial stability, saying a weak monetary policy could pose a significant risk.
They showed a rapid rise in interest rates, and they said the deployment of a bond portfolio could be aggressive.
“Participants noted that in light of the current high level of securities of the Federal Reserve, it would probably be appropriate to significantly reduce the size of the balance sheet,” – said in a summary of the meeting.
After a two-day session, the Federal Open Market Committee, which is developing the policy, decided not to raise interest rates yet, but insisted that the increase was approaching in March.
Despite the seemingly hawkish tone, stocks suffered losses after the release of the protocol.
“The market has rightly interpreted them as pigeons compared to expectations,” said Simona Mokuta, chief economist at State Street Global Advisors. “Honestly, I would call them anti-menopausal.”
Markets have been tense over the past few weeks as rising inflation and hawkish talk by some Fed officials, particularly Fed Chairman St. Louis James Bullard, has forced traders to raise prices this year in the equivalent of seven 0.25 percentage points. Market prices declined slightly after the release of minutes, with a 50-50 probability that the Fed will raise its benchmark rate by 1.75 percentage points.
“There’s been so much hype lately that I think everyone was ready for a very hawkish tone in minutes, and the minutes were more like,‘ We’ll do it, of course, but we’ll walk through before we run, ’” Mokuta said. “It seems the Fed has enough to make four raises. Talk about hawk talk, tell everyone we’re watching closely, and if we need to do more, we can do more.”
In addition to discussing rates, the committee has defined procedures for how it will begin deploying its nearly $ 9 trillion balance sheet, which consists mostly of bonds it purchased in an attempt to lower rates and stimulate growth.
March is also the month when the asset purchase program ends, although some meeting participants had hoped for a faster completion. Instead, the committee identified a way for the Fed to buy $ 20 billion in Treasury bonds over the next month and nearly $ 30 billion in mortgage-backed securities.
“Several participants have stated that they are in favor of stopping the Committee’s purchase of net assets as soon as possible, in order to send an even stronger signal that the Committee seeks to reduce inflation,” the protocol said.
Friends discussed how the balance will be reduced. The most likely way is to allow some bond redemption income to decrease each month rather than reinvest. However, some officials have said they may need to sell mortgages directly to transfer the balance sheet exclusively to the Treasury.
After the meeting, recent inflation data showed that prices are growing at the fastest pace in 40 years. The Fed is targeting inflation averaging about 2%, and officials have acknowledged that policies need to be tightened to lower prices.
According to the minutes, a significant part of the discussion during the meeting was occupied by inflation. The term is mentioned in the summary 73 times, with members saying the price increase was stronger and more persistent than they expected.
“Participants noted that recent inflation figures continue to far exceed the Committee’s long-term goal, and higher inflation persists longer than expected, reflecting the imbalance of supply and demand associated with the pandemic and economic recovery,” the document said.
FOMC members noted that inflation is beginning to spread abroad A pandemic of covanvirus covid infection-affected sectors and the wider economy.
“Participants acknowledged that high inflation was a burden on U.S. households, especially those who were least able to pay higher prices for essential goods and services,” the report said.
They also talked about financial stability. Officials noted that the risks stem from higher asset prices as well as the rapid rise in crypto asset prices.