The US Federal Reserve chose to go with a conservative 25 basis point hike in key rates but the minutes of the Federal Open Market Committee (FOMC) meeting in March reveal that several members had called for an aggressive 50 bps hike in interest rates.
The hawkish stance was due to these reasons: inflation well above the Committee’s objective, inflationary risks to the upside, and the federal funds rate well below participants’ estimates of its longer-run level. However, due to concerns over Russia’s invasion of Ukraine and its effects on the economy, the hike was restricted to 25 bp.
The minutes revealed that most FOMC members agreed that one or more 50 bps hikes might be appropriate in the next meetings “if inflation pressures remained elevated or intensified”.
So, while the inflation in the US is at a 40-year high on the back of higher fuel and commodity prices, the Federal Reserve may institute a 50 bps hike in the next meeting. The next meeting of the Committee is on May 3-4, 2022.
The minutes also revealed the Fed’s plans of reducing its $8.9-trillion balance sheet. The balance sheet swelled over an aggressive bond repurchase program. The Fed bought $1.5 trillion combined in government debt and $120 billion a month in Treasury and mortgage-backed securities between May 2020 and March 2022.
The Fed will allow its securities worth $95 billion to roll off and mature every month without being replaced. This would include $60 billion in Treasuries and $35 billion in mortgage bonds to mature every month, allowing the Feds to cut down its balance sheet much faster than the last time it conducted this exercise in 2017 to 2019. The runoff might have a similar effect on the economy as a quarter percentage point hike.
At the same time, the Feds have to carefully conduct the exercise so that it doesn’t impact the economic growth amid price pressure. With Leon Cooperman and the Deutsche Bank predicting an economic recession to hit the US in 2023, it will be up to Fed Chair Jerome Powell to balance economic growth and reduce runaway inflation.
