Realize that the action is behind? Fed slams on the brakes to fight inflation, doubles the speed of contraction

Federal Reserve officials in March discussed aggressively shrinking the balance sheet by $95 billion a month starting in May, new records show. The record also strongly suggests that the Fed could expand to two yards (50 basis points) in a single future rate hike.

CNBC, the British Financial Times and other foreign sources reported that the minutes of the Federal Open Market Committee (FOMC) March 15-16 meeting disclosed by the Fed on the 6th showed that the participating officials “generally agreed” that the balance sheet should be reduced by up to 95 billion US dollars per month. , let the principal not be invested after the maturity of $60 billion in government bonds and $35 billion in agency mortgage-backed securities (MBS). The action to reduce the balance sheet will be gradually implemented within three months, and it is likely to start in May.

In other words, this time the pace of shrinking the balance sheet is twice as fast as in 2017-2019, and it is also a historic turning point for the Fed to withdraw from its ultra-loose monetary policy stance.

However, demand for MBS is now low, people are not willing to refinance loans, and the 30-year mortgage yield has exceeded 5%. Records show that Fed officials admitted that passively letting MBS not invest after it expires may not be enough, and will consider selling directly after the balance sheet reduction operation is well under way.

The record also shows that central bank officials are considering raising the rate of a single rate hike from the original one yard (25 basis points), followed by multiple rate hikes of two yards, especially if inflation pressures linger or even heat up Down. In fact, many officials prefer to raise interest rates by two yards in March, but the war between Russia and Ukraine has deterred some people.

The record also mentioned that all participating members expressed their strong determination to take necessary actions to restore price stability.

This means that the Fed will shrink its balance sheet by nearly $1 trillion a year. U.S. stocks fell after the announcement of the FOMC record, but the losses in late trading were restrained. The S&P 500 ended the day down 0.97% on the 6th. In contrast, U.S. 10-year yields rose 6 basis points to 2.61 percent.

The Fed’s dovish governor, Lael Brainard, hinted on the 5th that the central bank may take a more aggressive approach to tightening money, and will begin a “rapid” reduction in the central bank as soon as May Balance sheet of nearly $9 trillion in size.

Market consensus is that the Fed will raise interest rates by a total of 250 basis points this year (2022). It’s a warning to any investor who believes the Fed will be modestly anti-inflation, said Quincy Krosby, chief equity strategist at LPL Financial. The Fed’s message is, “You’re wrong.”

Eric Winograd, an economist at AllianceBernstein, said the Fed clearly realized it was falling behind the curve and had to catch up.

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