By Nathalie Voit

 

The Federal Reserve plans to rapidly reduce the size of its balance sheet starting in May, according to minutes of the March Federal Open Market Committee (FOMC) meeting released on April 6. 

 

Balance sheet reduction will occur more rapidly than during the 2017-19 period when securities holdings were allowed to runoff by about $50 billion a month. According to meeting minutes, officials will nearly double that rate to an initial $95 billion per month. 

 

“Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency mortgage-backed securities (MBS) would likely be appropriate,” meeting details read.

 

Members also concurred that the caps could be phased in over three months, most likely beginning in May. 

 

The March 15-16 FOMC meeting minutes were released just one day after Federal Reserve Governor Lael Brainard provided keynote remarks at the Spring 2022 Institute Research Conference in Minneapolis on April 5. 

 

“It is of paramount importance to get inflation down,” Brainard said. “Accordingly, the Committee will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.” 

 

“Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017–19,” she added.  

 

In light of the uncertainty associated with the Russian invasion of Ukraine, officials from the central bank increased the federal funds rate by 25 basis points at the March meeting instead of the “preferred” 0.50%. However, most economists expect more aggressive, half-percentage point rate increases ahead.

 

According to the CME FedWatch Tool, the probability of a 50-basis point rate hike at the May FOMC meeting is 82.1% as of April 7 at noon. In contrast, the probability of a 25-basis point hike is just 17.9%.

 

Officials expect rate hikes at each of the six remaining meetings this year.