MNI: Fed Officials Favor Cutting QT Pace By Half 'Fairly Soon'

Federal Reserve officials favor reducing the pace of QT by roughly half "fairly soon" while keeping interest rates on hold until they've gained more confidence that inflation was continuing to fall toward 2%, according to the minutes of the March FOMC meeting published Wednesday.

The QT taper would involve reducing the cap on Treasuries runoffs and maintaining the existing pace for agency mortgage backed securities, because MBS redemptions are expected to continue running well below the current monthly cap, the minutes said. Since QT began in June 2022, the Fed's balance sheet has shrunk by roughly USD1.5 trillion.

Although QT was proceeding smoothly, Fed officials said it would be "appropriate to take a cautious approach to further runoff," to minimize the risk of any money market disruption like that of the repo market episode in 2019, the minutes said. Only a few officials said they would prefer to continue with the current pace until market indicators showed signs that reserves were approaching an ample level, while "the vast majority of participants thus judged it would be prudent to begin slowing the pace of runoff fairly soon."

"The decision to slow the pace of runoff does not mean that the balance sheet will ultimately shrink by less than it would otherwise," the minutes said. "Rather, a slower pace of runoff would facilitate ongoing declines in securities holdings consistent with reaching ample reserves."

No decision was made at the March meeting, which included staff simulations of various options for when to slow the pace of runoffs, the Fed said.

'UNEVEN PATH' OF DISINFLATION

Fed officials also agreed that rate cuts were likely in store "at some point this year" if the economy continued to evolve as they expected. A majority of FOMC members last month penciled in three cuts this year.

Officials said they were uncertain about the persistence of high inflation and said "recent data had not increased their confidence that inflation was moving sustainably down to 2%," the minutes said.

"The disinflation process was continuing along a path that was generally expected to be somewhat uneven," the minutes said. "They did not expect it would be appropriate to reduce the target range for the federal funds rate until they had gained greater confidence that inflation was moving sustainably toward 2%."

Market pricing has since moved away from the FOMC's projection for three cuts after stronger than expected jobs and inflation data over the past week. Futures traders now see just two quarter-point cuts this year, with only a 16% chance of the first in June, according to the CME Group's FedWatch tool. (See: MNI INTERVIEW: 'Nothing Good' In CPI - Ex-Fed Board's Kamin)