Fed officials plan to shrink the balance sheet by $95 billion a month, meeting minutes indicate

At the Federal Reserve's March meeting, officials discussed how to reduce their trillions of bond holdings, with a consensus of around 95 billion.

The limit of $60 billion in Treasurys and $35 billion in mortgage-backed securities would be phased in over three months.

The Fed decided to raise its interest rate for the first time in three years. The benchmark short-term borrowing rate was lifted from the zero level where it had been since March 2020 by the 25 basis point increase.

The balance sheet talk was one of the topics that officials discussed with members.

The level of rate hikes at upcoming meetings is in line with market pricing for the May vote. There was a lot of sentiment last month.

Many participants noted that with 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.

The 50 basis point move was put off by the uncertainty over the war in Ukraine.

Government bond yields were higher after the Fed release.

The minutes warned anyone who thought the Fed was going to be more dovish in their fight against inflation.

The balance sheet talk was related to the Fed's relative hawkishness. Some members wanted no caps on the amount of monthly runoff, while others said they were good with limits.

The Fed will allow a capped amount of proceeds from maturing securities to roll off each month while the rest is reinvested. Short-term Treasury bills are high valued as safe and liquid assets by the private sector and would be targeted.

The minutes indicated that the process could start in May.

At the meeting, Fed officials raised their inflation outlook and lowered their economic growth expectations. The central bank tightens due to surging inflation.

Markets were interested in the minutes release for details about monetary policy. The minutes of the Fed's meeting would give details on the thinking about balance sheet reduction, according to Chairman Powell.

The Fed increased its holdings by more than double after the crisis. The purchases ended a month ago, despite the fact that inflation was higher than anything the U.S. had seen since the early 1980s.

Policymakers have become more strident in their views about inflation.

Governor Lael Brainard said Tuesday that bringing prices down will require a combination of steady hikes and aggressive balance sheet reduction. The Fed is expected to raise rates a total of 250 basis points this year.

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