It emerged last month that many officials would have preferred a half-percentage point rate hike, but ultimately resorted to a quarter-point increase in light of Russia‘s invasion of Ukraine. But they expect one or more half-point increases if price pressures fail to ease.
The Fed’s balance sheet blowout will be at a maximum monthly pace of $60 billion in Treasuries and $35 billion in mortgage-backed securities, nearly double the maximum $50 billion a month the Fed blew off its balance sheet between 2017 and 2019.
Waiting for May
The FOMC is expected to approve the deflating of its balance sheet at its next meeting on May 3-4. The move to reduce the balance sheet marks a sharp turn toward fighting inflation. As recently as last month, the Fed was buying bonds to smooth the end of pandemic support.
U.S. central bankers raised interest rates by a quarter percentage point at their March meeting, lifting them from near zero, where they had been since March 2020. They signaled six more such moves this year. Shrinking the size of their balance sheet, which ballooned to $8.9 trillion as they aggressively bought bonds to protect the economy from Covid-19, will also help tighten financial conditions.
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The U.S. consumer price index rose 7.9% in February, the most since 1982. U.S. labor markets remain strong and the unemployment rate fell to 3.6% last month as employers created 431,000 jobs.