Fed March Meeting Minutes: ‘Many’ Officials Support Big Rate Increase

The minutes of the Federal Reserve’s March meeting showed that central bankers were preparing to immediately reduce their bond holdings while raising interest rates “quickly,” two policies that would make money more expensive to borrow and spend.

The Fed is trying to cool a hot economy, hoping to tame inflation, which is running at its fastest pace in four decades.

Central bankers raised interest rates by a quarter of a percentage point in March, the first increase since 2018 — and the minutes showed that “many” officials favored a larger rate hike and were held off only by the uncertainty associated with Russia’s invasion of Ukraine. Markets now expect the Fed to make a half-point increase in May and possibly June, even as they begin to draw additional support from the economy by shrinking their balance sheet.

The balance sheet is nearly $9 trillion — inflated by pandemic response policies — and Federal Reserve officials plan to shrink it by allowing some of their holdings of government-backed bonds to run out. This will raise long-term interest rates, which helps increase the rates for mortgages and other types of borrowing. Higher rates can dampen consumption and business investment, slowing growth, increasing weak hires and increasing wages. Ultimately, the chain reaction should help drive down the price increases.

The minutes showed that Fed officials at the meeting “expected that it would be appropriate to begin this process at an upcoming meeting, possibly as soon as possible in May.”

Federal Reserve officials are trying to calm the economy at a time when it is growing rapidly and the labor market is rapidly improving. Employers added 431,000 jobs in March, wages are rising rapidly, and the unemployment rate is close to the 50-year low that prevailed before the pandemic.

Central bankers hope that a strong labor market will help them slow the economy without pushing it into a complete recession. That would be a challenge, given the Fed’s scandalous policy tools, a fact officials have acknowledged.

At the same time, Federal Reserve officials are concerned that if they do not respond aggressively to higher inflation, consumers and businesses may expect continued price hikes. This can perpetuate rapid price increases and make wrestling under control even more painful.

“It is critical to bring down inflation,” Lyle Brainard, the Federal Reserve Governor and a candidate for central bank vice president, said on Tuesday. “Accordingly, the Committee will continue to tighten monetary policy systematically through a series of interest rate increases and begin reducing the balance sheet at a rapid pace once we meet in May.”

Ms Brainard’s statement that a balance sheet contraction could happen “quickly” surprised markets, sending stocks lower and bond prices higher. Investors also focused their attention on the minutes of Wednesday’s session.

Besides confirming Ms Brainard’s indication that the balance sheet contraction could begin soon, the minutes showed that “many” of the meeting participants “would have favored a 50 basis point increase in the target range for the fed funds rate at this meeting.”

While they held off a significant increase amid the uncertainty associated with Russia’s invasion of Ukraine, officials indicated that increases above a quarter point may be appropriate if inflation remains high.

The minutes showed that “all participants emphasized the need to remain alert to the risks of increasing upward pressure on inflation and long-term inflation expectations.”

Officials cited signs that rapid price increases may continue.

The minutes showed that “many participants indicated that their business contacts continued to report significant increases in wages and input prices being passed through higher prices to their clients without any significant drop in demand.”

The minutes said factors that Fed officials believed could lead to continued inflation include “strong aggregate demand, significant increases in energy and commodity prices, and supply chain disruptions that will likely require a prolonged period to resolve.”

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