The Federal Reserve said Wednesday it would be prepared to reduce its $9 trillion balance sheet more quickly than forecast, minutes from the central bank's March meeting revealed, but largely signaled near-term rate hikes amid the fastest domestic inflation in four decades.
The Fed will cap its monthly asset sales at $95 billion each month, comprised of $60 billion in Treasury bonds and $35 billion in mortgage bonds, the minutes indicated, a pace that's around twice as fast as the Fed's prior balance sheet run-off in 2017.
Policy makers are also agreed that interest rate hikes should happen 'expeditiously', cementing the case for 50 basis point increases over each of the next three meetings, a view that was largely in-line with Street forecasts.
"All participants indicated their strong commitment and determination to take the measures necessary to restore price stability. In that context, participants judged that the Committee's approach of commencing increases in the target range for the federal funds rate, and indicating that ongoing increases were likely, was fully warranted," the minutes said. "Participants judged that it would be appropriate to move the stance of monetary policy toward a neutral posture expeditiously. They also noted that, depending on economic and financial developments, a move to a tighter policy stance could be warranted."
U.S. stocks pared some of their declines following release of the minutes at 2:00 pm Eastern time, with the Dow Jones Industrial Average trading80 points lower and the S&P 500 retreating 33 points. Benchmark 10-year Treasury note yields, meanwhile, edged to 2.601%, down from an overnight high of 2.649% but higher than this morning's lows.
Commentary in the minutes appeared to indicate how voting members of the Fed's Open Markets Committee have altered their views on inflation from their January meeting, when at least some had suggested inflation would return to target before the end of the year.
Since then, supply chains have been hit by another Covid surge in China and oil, food and energy prices have soared as a result of the impact of Russia's war on Ukraine, adding to the "stickiness" of inflation prospects and cementing the case for at least seven more rate hikes between now and the end of the year.
"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 said. "A number of participants noted that the Committee's previous communications had already contributed to a tightening of financial conditions, as evident in the notable increase in longer-term interest rates over recent months."
The CME Group's FedWatch tool suggests a 77.7% chance of a 50 basis point hike in May, followed by a 60% chance in June and a 48.5% chance in July.
"Another very hawkish readout indicates the fed is willing to walk the walk. Aside from the pace of the balance sheet roll off, most telling from the minutes was the preparedness to hike 50 basis points last month," Sean Bandazian, senior investment analyst for Cornerstone Wealth in Charlotte, North Carolina, who called the Fed's rate signaling "the most aggressive in a generation".
"If not for the crisis in Eastern Europe we could have been staring down at least three meetings in a row with 50 basis point hikes, which the market was not expecting," he added.
