Minutes of the Fed’s March 2022 meeting:

Federal Reserve officials discussed how they want to reduce their holdings of trillions of dollars in bonds at the March meeting, with a consensus of around $95 billion, minutes released on Wednesday showed.

Officials “generally agreed” that it would allow a maximum of $60 billion in Treasurys and $35 billion in mortgage-backed securities, in phases over three months. This total will be about twice the rate of the last effort, from 2017-2019, and is part of a historic shift from ultra-easy monetary policy.

In addition to the balance sheet talk, officials also discussed the pace of future rate hikes, as members lean toward more aggressive moves.

At the meeting, the Fed approved its first rate hike in more than three years. The increase of 25 basis points – a quarter of a percentage point – has lifted the record short-term borrowing rate from a level near zero where it has been since March 2020.

Despite this, the minutes indicated a possible 50 basis point rate hike in upcoming meetings, a level consistent with market rates for the May vote. In fact, there was great sentiment to rise last month. Uncertainty about the war in Ukraine deterred some officials from moving forward by 50 basis points in March.

The minutes stated that “many participants indicated that one or more increases of 50 basis points in the target range may be appropriate at future meetings, especially if inflation pressures remain elevated or intensified.”

Stores Fell after the Fed’s release While government bond yields remained higher. The market, however, pulled back from its lows as traders adjusted to the central bank’s new stance.

Quincy Crosby, chief equity strategist at LPL Financial, said the minutes were “a warning to anyone who thinks the Fed will be more pessimistic in its fight against inflation.” “Their message is, You are wrong.”

Indeed, in recent days, policymakers have become more hawkish in their views on curbing inflation.

Governor Lael Brainard said Tuesday that lowering prices will require a combination of steady hikes as well as a significant reduction in the balance sheet. Markets expect the Fed to raise interest rates by a total of 250 basis points this year.

Crosby said the stance of policymakers should not come as a huge surprise.

“The Fed has coordinated a coordinated effort to warn the market, and has told the market in no uncertain terms that this is serious, this is critical, we will fight inflation,” she said. “What they have on their side is that the job market is still healthy, and that’s important. What you don’t want is that the Fed is making a policy mistake.”

The Fed’s relative tightening has spilled over into balance sheet rhetoric. Some members did not want to cap their monthly run-off, while others said they were doing well with “relatively high” limits.

The balance sheet list would see the Fed allow a set level of returns from the securities outstanding each month while reinvesting the remainder. Short-term Treasury holdings will be targeted because they are “highly valued as safe and liquid assets by the private sector.”

While officials did not take any official vote, the minutes indicated that members agreed that the process could begin in May.

However, the question remains as to whether runoff will actually reach $95 billion. Demand for MBS is now weak with lower demand for refinancing and higher interest rates. Officials acknowledged that negative mortgage runoff likely wasn’t enough, with direct sales considered “after the balance sheet runoff was well underway.”

Also at the meeting, Federal Reserve officials sharply raised their inflation forecasts and lowered their forecasts for economic growth. High inflation is the driving factor behind the central bank’s tightening.

Markets were looking forward to the Minutes release for details on monetary policy direction from here. Specifically, Federal Reserve Chairman Jerome Powell said in his post-meeting press conference that the minutes will provide details on thinking about the balance sheet cut.

The Fed expanded its holdings to about $9 trillion, or more than doubled, during monthly bond purchases in the wake of the pandemic crisis. Those purchases ended just a month ago, despite evidence of massive inflation higher than anything the US has seen since the early 1980s, a boom that then-President Paul Volcker quelled by dragging the economy into recession.