(Reuters) -Federal Reserve officials “generally agreed” to trim $60 billion per month from the U.S. central bank’s Treasury holdings and $35 billion from its holdings of mortgage-backed securities, with the amounts phased in over a period of three months “or modestly longer,” according to minutes of their March policy meeting.
Participants in the Fed policy discussion also “generally agreed” that after the balance sheet runoff was “well underway” it would be appropriate to consider outright sales of MBS, according to the minutes, which were released on Wednesday.
Left to fall off passively, only as mortgage payments were made, the monthly decline in those securities would likely “run under the proposed monthly cap” and remain “a sizeable share of the Federal Reserve’s asset holdings for many years.”
The Fed began a massive bond-buying program in the spring of 2020 to help blunt the economic impact of the coronavirus pandemic, swelling its balance sheet. The Fed currently holds about $8.5 trillion of Treasuries and MBS.
No final decision on the run-off was made at the March 15-16 policy meeting, the minutes said, but officials made “substantial progress” and could “begin the process of reducing the size of the balance sheet as early as after the conclusion” of the May 3-4 meeting.
Yields on U.S. Treasury securities ticked higher after the release of the minutes, with 10-year note yield climbing above 2.6%. The dollar rose to its highest level since late May against a basket of currencies, while major U.S. stock indexes briefly pared losses before continuing to fall.
“I don’t think there’s anything material that would garner a change in sentiment, as opposed to yesterday where there was a real change and I think it really spooked investors,” said Alan Lancz, president of Alan B. Lancz and Associates in Toledo, Ohio, referring to comments made by Fed Governor Lael Brainard on Tuesday.
Brainard told a Minneapolis Fed conference that she expected a combination of interest rate increases and a rapid balance sheet runoff to bring U.S. monetary policy to a “more neutral position” later this year, with further tightening to follow as needed.
BIGGER HIKES
The minutes depicted a central bank navigating a complex landscape, with the spike in COVID-19 cases over the winter leaving only a “mild and brief imprint” on the economy, but the war in Ukraine causing some policymakers to back off from what they would have preferred to be a half-percentage-point interest rate increase in March.
The Fed raised its benchmark overnight interest rate by a quarter of a percentage point on March 16, but the minutes appeared to set the stage for meatier hikes in borrowing costs down the line.
“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,” the minutes stated.
Inflation, by the Fed’s preferred measure, is running at about three times its 2% target.
(Reporting by Howard SchneiderEditing by Paul Simao)
