The Federal Reserve announces severe monetary policy tightening

Several FOMC members want a 50-point rate hike and a sharp cut in the Federal Reserve’s balance sheet, according to the minutes of the FOMC’s March meeting.

Most analysts did not expect such strict plans to tighten monetary policy in the United States. Already at the March meeting of the Federal Open Market Committee (When the decision to raise the federal funds rate was made for the first time) “Many” policy makers would like the Fed to raise interest rates by 50 basis points. At the meeting, not by 25 basis points, as it was in previous sessions.

– Several participants noted this A rise of one or more than 50 points in the fed funds rate bracket may be appropriate at future meetingsEspecially if inflationary pressure remains high or intensifies – we read in the minutes of the March FOMC meeting. US CPI inflation accelerated in February to 7.9% y/ynearly four times the Federal Reserve’s 2 percent target.

By the end of 2022, the forward market expects the fed funds rate to increase to 2.5-3.0% from the current 0.25-0.50%. This means an overall rise of 225-250 basis points. Divided into six committee meetings this year. So the market had already priced the change in the “caliber” of Fed hikes from 25 basis points. at 50 basis points. If such a path of increases were actually achieved (which remains a highly uncertain option), it would be the fastest pace of Fed policy tightening (or rather normalization) in nearly three decades.

But it doesn’t stop there. Federal policy makers also discussed quantitative easing (QT) plans, under which the US central bank will cut its overall balance sheet. The official announcement of the QT, according to President Powell’s announcement, is due in less than a month, at the May meeting of the Federal Open Market Committee.

The minutes of the committee’s March meeting reveal that policymakers “broadly agree” to a $95 billion-a-month reduction in the balance sheet. This will be a faster pace than economists forecast, who expect Qt of $60-90 billion per month. Remember that for most of the past two years, the Fed has been “printing money” (i.e. increasing its total balance sheet) at a rate of $120 billion per month, reducing the volume of bond purchases since only last fall.

Between March 2020 and March 2022, the Federal Reserve’s balance sheet increased by nearly $4.8 trillion, averaging nearly $200 billion per month. As you can see, even QT of close to $100 billion per month will still be twice as slow as the pace of monetary expansion in the past two years.

However, the market reaction to the publication of the March minutes was notable. The yield on two-year US government bonds reached its highest level in nearly three years (2.58%). The yield of 10-year Treasuries increased 7.5 basis points, reaching 2.6580% in storms – the highest level since December 2018. Only since the beginning of the year has the yield of US 10-year bonds increased by more than 100 basis points, which in this market is an important step Extremely.

Wall Street’s reaction has been to sell stocks, especially growth-sensitive growth companies. The Nasdaq is down 2%, the S&P500 is down 0.85%, but the Dow Jones is down just 0.3%.

Federal Reserve executives seem desperate enough to correct their past mistakes as quickly as possible and virtually stem accelerating price inflation. Powell and colleagues: On March 20 they loosened their monetary policy a lot and continued for at least a year a regime of zero interest rates and massive purchases of securities while creating empty money. Now, fearful of losing control of inflation expectations, they intend to tighten monetary policy in an environment of a rapidly slowing economy and the highest price inflation in 40 years.

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