FOMC Minutes: Fed To Move Policy Towards Neutral Expeditiously

According to the minutes of the March FOMC meeting, participants judged that it would be appropriate to move the stance of monetary policy towards a neutral posture expeditiously, reported Reuters.

Balance Sheet Reduction
“On balance sheet reduction, participants generally agreed monthly caps of about $60B for Treasury securities, $35B for mortgage-backed securities would likely be appropriate.”

“Participants generally agreed that caps could be phased in over a period of three months or modestly longer if market conditions warrant.”

“All options reviewed by policymakers featured a more rapid pace of balance sheet runoff than in the 2017–19 episode.”

“Participants generally agreed that after balance sheet runoff had gotten well underway, would be appropriate to consider sales of mortgage-backed securities.”

“Most participants judged it appropriate to redeem treasury coupon securities each month up to the cap amount and to redeem treasury bills when coupon principal payments were below the cap.”

“Participants agreed the Fed was ‘well placed’ to begin balance sheet reduction as early as after the end of the Fed’s May meeting.”

“Several participants remarked that reducing T-bill holdings over time would be appropriate because they are highly valued as safe and liquid assets.”

“Participants agreed reducing the balance sheet would play important role in firming the stance of monetary policy and expected it would be appropriate to begin this process at a coming meeting, possibly as soon as in May.

“Participants generally noted that maintaining large holdings of T-bills is not necessary under an ample-reserves operating framework.”

Interest Rate Hikes

“Many participants noted that they would have preferred a 50 basis point increase in the target range for the federal funds rate at this meeting.”

“Many participants noted that one or more 50 basis point increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified.”

US Economy, Inflation
“All participants underscored the need to remain attentive to the risks of further upward pressure on inflation and longer-run inflation expectations.”

“Participants agreed uncertainty regarding the path of inflation was elevated and that risks to inflation were weighted to the upside.”

“Various participants also noted downside risks to the outlook, including risks from the Russian invasion of Ukraine, a broad tightening in global financial conditions, and a prolonged rise in energy prices.”

“Several participants judged the upside risk to inflation associated with Ukraine war appeared more significant than the downside risk to growth.”

Monetary Policy, Quantitative Tightening
“Participants also noted that, depending on economic and financial developments, a move to a tighter policy stance could be warranted.”

“All participants judged risk management would be important in deciding the appropriate stance of monetary policy, and that policy also would need to be nimble in responding to incoming data and the evolving outlook.”