FOMC MINUTES: Participants generally agreed monthly caps of roughly USD 60bln for Treasury securities and USD 35bln from holdings of MBS

BALANCE SHEET:

• Participants generally agreed monthly caps of roughly USD 60bln for Treasury securities and USD 35bln from holdings of MBS.


• Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant.


• Participants "generally agreed" that after the balance sheet runoff was "well underway" it would be appropriate to consider outright sales of MBS.


• A Committee decision to implement a program of agency MBS sales would be announced well in advance.


• All options reviewed by policy makers featured a more rapid pace of balance sheet runoff in the 2017-19.


• Participants agreed Fed was well placed to begin balance sheet reduction as early as after the Fed's May meeting.


• Participants agreed reducing the balance sheet would play an important role in firming the stance of monetary policy, and expected would be appropriate to begin as soon as May meeting.


• Several participants noted the significant uncertainty around the future level of reserves that would be consistent with the Committee's ample-reserves operating framework.


• Against this backdrop, participants generally agreed that it would be appropriate to first slow and then stop the decline in the size of the balance sheet when reserve balances were above the level the Committee judged to be consistent with ample reserves, thereby allowing reserves to decline more gradually as nonreserve liabilities increased over time.


• Several participants remarked that they would be comfortable with relatively high monthly caps or no caps.


• Some other participants noted that monthly caps for Treasury securities should take into consideration potential risks to market functioning.

RATES: 

• Many participants noted that they would have preferred a 50bps increase in the target range for the FFR at this meeting.


• A number of these participants indicated, however, that, in light of greater near-term uncertainty associated with Russia's invasion of Ukraine, they judged that a 25 basis point increase would be appropriate at this meeting.


• Many participants noted that one or more 50bps increases in the target range could be appropriate at future meetings, particularly if inflation pressures remain elevated or intensified.

T-BILLS:

• Participants generally noted that maintaining large holdings of t-bills is not necessary under ample-reserves operating framework.


• 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.


• Under this approach, redemption of Treasury bills would typically bring the total amount of Treasury redemptions up to the monthly cap.


• A couple of participants commented that holding some Treasury bills could be appropriate if the Federal Reserve wished to keep its Treasury portfolio neutral with respect to the universe of outstanding Treasury securities.

Inflation

• Participants agreed on uncertainty regarding the path of inflation was elevated and the risk to inflation was weighted to the upside.


• A few participants also noted that the number of spending categories experiencing inflation rates above 4% had continued to rise.


• Many participants indicated that their business contacts continued to report substantial increases in wages and input prices that were being passed through into higher prices to their customers without any significant decrease in demand.


• Participants commented on a few factors that might lead the high inflation readings to persist, including strong aggregate demand, significant increases in energy and commodity prices, and supply chain disruptions that were likely to require a lengthy period to resolve.


• Some participants noted that recent higher inflation could affect future inflation dynamics.

Via Federal Reserve

Reaction details (19:52)

• The initial market reaction was choppy.


• Initially, despite the hawkish minutes, it was a dovish reaction (upside in equities, treasuries, downside in Dollar) as it unwound some of that hawkish market pricing since Brainard's speech on Tuesday.


• However, the move was short-lived and it reversed back to a typically hawkish reaction, notably in the Dollar which saw the Dollar index rise from lows of 99.345 to highs of 99.778.


• Albeit, the Dollar is now off highs but still positive, while equities are off lows but Treasuries remain near post FOMC minutes lows, but still off the low seen earlier in the session.


• Market pricing saw a slightly hawkish increase, pricing in a 85% chance of a 50bp move in May, from 82% pre-minutes. 

06 Apr 2022 - 19:00- Fixed IncomeEconomic Commentary- Source: Federal Reserve