EconoFACTS

April 06, 2022 | 14:38

Minutes of March 14-15 FOMC Meeting: Bigger and Faster

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Given all the post-meeting chatter from officials about the need to quickly normalize policy to tame inflation, the main question going into the release of the minutes was: how fast would the Fed raise rates and shrink its balance sheet? The minutes suggest plenty fast given that the members assessed the risks to the inflation outlook to be on the upside.

On rates: "Many" members would have preferred a half-point inaugural hike in March, and "many" thought that one or more 50-bps rate increases "could be appropriate" if inflation stays high. This confirms the near unanimous aggressive rate talk from even the more dovish end of the policy spectrum of late. It also supports our call for half-point rate hikes at the next two meetings in May and June.

On QT: The Fed will lose little time in winding down its $8.9 trillion balance sheet that nearly doubled in size during the pandemic. The process could begin "as early as after the conclusion" of the May meeting. The members "generally agreed" to reduce Treasury note holdings by $60 billion per month and mortgage bond holdings by $35 billion, phased in over a period of three months or modestly longer depending on market conditions. The majority of members said it would even be appropriate to redeem Treasury bills when the redemption of Treasury notes fell below the cap, which will keep the overall pace of balance sheet reduction steady. That's serious QT. The Fed is planning a faster rundown of its portfolio than in the 2017-19 period, reflecting the stark difference in inflation outcomes. In addition, there was general agreement to consider outright sales of mortgage bonds after runoff was "well underway". This would put even more pressure on mortgage rates, further slowing the housing market.

Bottom Line: Barring some really bad economic news in coming weeks, or miraculously good inflation news, the Fed looks to ramp up its tightening cycle with a 50-bps rate hike on May 4 and a likely announcement to begin reducing its massive balance sheet.