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Fed prepares to slash size of swollen balance sheet by $95bn a month

The Federal Reserve is expected to start lowering assets of up to $ 95 billion a month from the swollen $ 9 billion balance sheet, as it intensifies efforts to curb rising US inflation.

A report on the recent meeting of the Federal Open Market Commission in March showed that officials are finalizing a plan to reduce the central bank’s presence in U.S. government bond markets, a process that will begin as early as next month.

The Fed’s footprint in the debt markets expanded significantly during the epidemic, as it raised trillions of dollars in treasury and mortgage-backed securities agencies in an attempt to prevent an economic disaster.

But faces a sustained high inflationThe Fed is now trying to tighten monetary policy, and reducing its balance sheet size is the main lever it can pull to cool the U.S. economy after raising interest rates.

According to the minutes of the March meeting, officials are widely supporting the Fed in increasing the rate at which it dismantles its asset holdings over the next few months through a process known as a “drift,” whereby the central bank stops reinvesting income from growing securities. .

FOMC members broadly agreed on monthly ceilings of about $ 60 billion for the Treasury and $ 35 billion for the MBS agency, which were gradually introduced over a three-month period or “more modestly if market conditions warrant.” That comes down to a reduction in assets of less than a million dollars a year.

“The Fed has clearly identified at this point that they are behind the curve,” said Eric Winograd, an economist at AllianceBernstein.

Winograd added: “When you’re behind the curve you have to hurry to catch up. Now they’re in a hurry.

Markets reacted modestly for minutes, as did the S&P 500 Rejected About 1% and the yield on the 10-year Treasury bill rose by 0.06 percentage points to 2.61%.

Meanwhile, protocols have shown that officials are open to more aggressive interest rate hikes this year to combat price hikes following the Fed’s decision to raise federal funds’ interest rates by a quarter of a percent last month – the first hike since 2018.

Many participants said that raising one or more half-point interest rates in the coming meetings may be appropriate if inflation remains high or rises.

If the Fed continues with two such adjustments this year, as markets currently expect, the rate of federal funds will reach a “neutral” level that does not accelerate or slow growth until the end of the year. Officials estimate that this rate ranges from 2.3% to 2.5%.

The Fed plans to increase its asset depreciation by dumping holdings on shorter dates Ministry of Finance Banknotes in months when the amount of bonds is longer appearing under the new caps.

Officials are also considering a complete sale of MBS’s Fed holdings once the contraction in the balance sheet is “on track.” The Fed has previously stated that it prefers to hold only bonds in its portfolio.

Jim Caron, portfolio manager at Morgan Stanley, said the fact that absolute sales of MBS agency sales are considered “speaks volumes” about the extent of the monetary tightening it needs to implement to reduce inflation.

The protocols show that central bankers want to shrink the balance sheet quickly, and much faster than the previous attempt to shed assets in 2017, after the Fed’s holdings increased due to bond purchases following the global financial crisis that began in 2008.

So, the Fed limited its monthly decline in its balance sheet by $ 50 billion and it took a year to reach that rate.

Liel Brainard, a governor awaiting Senate approval to be the next deputy chairman of the Fed, said on Tuesday that the “quick” reduction in the size of the balance sheet is justified given that the inflation rate exceeds 2% of the central bank. Force Of the labor market.

Jay Powell, chairman of the Fed, suggested that the expected rate of balance sheet reduction this year is roughly equal to a quarter-point rate hike.

In the weeks since the meeting, in which most officials signaled that interest rates should rise to 1.9% by the end of 2022, policymakers have publicly announced Backed up An even more hawkish position.

Mary Daly, President of the Fed of San Francisco, Told The Financial Times on Friday said the claim for a half-point rate hike at a May meeting has grown, echoing a number of its colleagues who have in recent weeks signaled support for a faster and more vigorous tightening of monetary policy.

Fed prepares to slash size of swollen balance sheet by $95bn a month Source link Fed prepares to slash size of swollen balance sheet by $95bn a month

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