The Federal Reserve is nearing a rapid rundown of its massive $9 trillion bond stash in the coming months to combat high inflation, a move that would contribute to higher borrowing costs for consumers and businesses.
In minutes of their last policy meeting three weeks ago, released Wednesday, Fed policymakers said they were likely to trim their holdings by about $95 billion a month — almost twice the rate five years ago, when they last trimmed their balance sheets .
At that meeting, the Fed raised its short-term interest rate for the first time in three years, signaling that it intends to raise rates well into next year.
The plan to rapidly reduce its bond holdings is the latest move by Fed officials to speed up efforts to fight inflation. Prices are rising at the fastest pace in four decades, and Fed officials have raised concerns in recent speeches about getting inflation under control.
The financial markets are now expecting much steeper rate hikes this year than the Fed officials signaled at their mid-March meeting.
Higher Fed interest rates will increase the cost of borrowing for mortgages, auto loans, credit cards and corporate loans. In doing so, the Fed hopes to cool economic growth and rising wages enough to curb high inflation, which has squeezed millions of households and poses a serious political threat to President Biden.
Many economists have feared that the Fed has waited too long to start raising rates and that policymakers could end up reacting aggressively enough to trigger a recession.
Chairman Jerome Powell opened the door to raising interest rates by up to a half-point at forthcoming meetings two weeks ago, rather than the traditional quarter-point.
The Fed has not raised interest rates by half a point since 2000. Lael Brainard, a key member of the Fed’s Board of Governors, and other officials have also made it clear that such large hikes are possible. Most economists now expect the Fed to hike rates by half a point at both its May and June meetings.
In a speech on Tuesday, Brainard underscored the Fed’s increasing aggressiveness by saying that the central bank’s bond holdings would “shrink at a much faster rate” over a “much shorter period” than the last time the Fed reduced its balance sheet in 2017-2019 At that time, the balance sheet was about 4.5 trillion dollars. Now it’s twice as big.
The Fed bought trillions of dollars in Treasuries and mortgage-backed securities after the pandemic hit the economy, with a goal of lowering rates on longer-term borrowing. It also lowered its short-term policy rate to near zero.
Last month it raised that rate to a range between 0.25% and 0.5%, the first hike in three years.
In a sign of how quickly the Fed is reversing policy, when it last bought bonds, there was a three-year gap between halting its purchases in 2014 and beginning to reduce its balance sheet in 2017. Now that shift will likely be in just three months take place, say economists.
Brainard’s comments prompted a sharp hike in the interest rate on the 10-year Treasury note, a policy rate that affects mortgage rates, business lending and other borrowing costs.
On Wednesday, that rate hit 2.6%, up from 2.3% just a week earlier, a sharp rise for that rate. A month ago it was only 1.7%.
Short-term bond yields have risen even higher, in some cases above the 10-year yield, a pattern that has historically been seen as a sign of an impending recession. However, Fed officials say yields in shorter-term bond markets are not sending the same warning signs.
https://nypost.com/2022/04/06/federal-reserve-moves-toward-slashing-bond-holdings-to-fight-inflation/ The Federal Reserve is beginning to cut its bond holdings to fight inflation