Federal Reserve Hints At Bigger Rate Hikes Ahead, Outlines Plan To Shrink Balance Sheet

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With numerous Federal Reserve officials sounding the alarm on inflation, minutes from the central bank’s latest monetary policy meeting released Wednesday hinted at bigger interest rate hikes ahead this year and outlined a plan to reduce its balance sheet by $95 billion per month.

Key Facts

Federal Reserve officials, who last month raised interest rates for the first time since 2018, detailed plans for further rate hikes and balance sheet reduction in the latest minutes, released Wednesday.

The central bank’s monetary policy committee discussed the speed of interest rate hikes this year, with several members indicating that they had preferred a 0.5 percentage point increase rather than the 0.25 point increase agreed upon in March.

With inflation at its highest level in 40 years and “risks to the upside,” some Fed officials are advocating for more aggressive rate hikes and monetary policy, which could signal bigger rate increases on the horizon.

Investors had also been closely watching for clues on how the central bank would reduce its trillions of dollars in bond holdings: Fed officials “generally agreed” to reduce the balance sheet by a maximum of $95 billion per month—slightly higher than the consensus expected by Wall Street, minutes showed.

The central bank currently has a balance sheet of around $9 trillion, which more than doubled in size after the Fed’s monthly bond purchase program that propped up the economy and markets during the coronavirus pandemic.

While that historic level of stimulus ended only last month, inflation fears have skyrocketed as rising prices show no signs of moderating—and a host of Fed officials have recently ramped up warnings, spooking markets.

Tangent:

Stocks fell immediately after the release of the latest Fed minutes, adding to losses this week. The Dow Jones Industrial Average fell 0.8%, nearly 300 points, while the S&P 500 lost 1.3% and the Nasdaq Composite 2.4%.

Key Background:

The central bank still forecasts six additional interest rate hikes this year and three more next year. While combating inflation is the Fed’s primary concern, officials have also warned about the “highly uncertain” economic impact from Russia’s invasion of Ukraine, which has wreaked havoc on commodities markets.

Crucial Quote:

It seems “very likely” that rates will go up by 0.5 percentage points at the Fed’s next policy meeting in May, says Vital Knowledge founder Adam Crisafulli. “The minutes were filled with commentary on inflation – this is clearly the paramount concern for the Fed and officials are keen to get prices under control.”

What To Watch For:

“At the current pace [of balance sheet reduction], it could take more than 5 years (and potentially as long as 8 years) to fully liquidate all of their holdings,” says Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “Chances are extremely high that we will encounter a recession before that happens.”