MNI: Fed To Aim For USD95B Cap To Shrink Balance Sheet

The Federal Reserve will begin rapidly shrinking its USD8.9 trillion balance sheet starting as early as May as part of a broader tightening campaign that has officials considering one or more 50BP rate hikes this year, minutes from the central bank's March meeting showed.

"Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate. Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant," the March FOMC minutes said.

FOMC members "agreed they had made substantial progress on the plan and that the Committee was well placed to begin the process of reducing the size of the balance sheet as early as after the conclusion of its upcoming meeting in May."

They also thought it would be appropriate to consider MBS sales "after balance sheet runoff was well under way," the report said. The minutes also said "most participants" judged that it would be appropriate to redeem coupon securities up to the cap amount each month and to redeem Treasury bills in months when Treasury coupon principal payments were below the cap.

As for rate hikes, "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 Fed raised interest rates by a quarter point at its last meeting, though St. Louis Fed President James Bullard dissented in favor of a 50BP increase. His view seems to have swayed many colleagues as a number of officials, including Fed Chair Jerome Powell, have signaled an inclination to hike at a more aggressive pace at one or more meetings this year.

So rapid has been the Fed's hawkish pivot that markets have grown to price in as many as 225 basis points of additional hikes for this year.

The reason for the central bank's growing propensity to tighten rapidly is an inflation rate that has gotten well out of the Fed's control. The consumer price index surged 7.9% in the year to March while the Fed's preferred PCE measure jumped 6.4% in the 12 months to February.