U.S. Federal Reserve Chairman Jerome Powell testifies before a Senate Banking, Housing, and Urban Affairs Committee hearing on the Fed’s “Semi-Annual Report on Monetary Policy to Congress” on Capitol Hill in Washington, USA United States, March 3, 2022. REUTERS/Jonathan Ernst/Pool

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April 6 (Reuters) – The Federal Reserve said on Wednesday it would likely start wiping assets off its $9 trillion balance sheet when it meets in early May and will do so at nearly twice the pace of its previous fiscal year of “quantitative tightening” as it faces inflation at its highest level in four decades.

Minutes from last month’s central bank meeting, released on Wednesday, showed policymakers were presented with a range of options to reduce the size of its balance sheet. This pool of assets has roughly doubled in size during the coronavirus pandemic as the Fed has used purchases of Treasuries and mortgage-backed securities to smooth the functioning of the market and increase the effects of its rate cuts. of interest. Read more

Here’s a look at what appears to be in the cards and how it differs from the 2017-2019 “QT” period.

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START EARLIER

The Fed looks set to kick off this QT cycle with just one meeting after raising its benchmark short-term interest rate for the first time since 2018.

QT’s last fall 2017 launch came nearly two years after its first rate hike, which took place in December 2015.

LARGER CAPS

Fed officials “broadly agree” on a plan to trim about $95 billion a month from its holdings, split between $60 billion in Treasuries and $35 billion in MBS.

This is roughly double the maximum pace of $50 billion per month targeted in the 2017-2019 cycle. At the time, the split was $30 billion in Treasuries and $20 billion in MBS.

FASTER RAMP-UP

During the last cycle, it took a full year for the Fed to reach its maximum cut rate of $50 billion a month. It started with $10 billion per month ($6 billion treasuries / $4 billion MBS) and increased by $10 billion per quarter until it reached its maximum rate at the fall 2018.

This time it will go from zero to $95 billion in the space of three months…”or slightly longer if market conditions warrant.” The minutes did not specify how the caps would be “phased in,” a detail likely to be worked out at the May 3-4 Federal Open Market Committee meeting that is expected to kick off the process.

BIGGEST BALANCE, BIGGEST LOSS

When the Fed launched its very first QT venture, its total balance sheet was around $4.5 trillion. In nearly two years of QT, he managed to reduce that figure from around $650 billion to just over $3.8 trillion before shutting down the program.

This time, the annualized monthly rate of reduction amounts to more than $1.1 trillion per year in balance sheet reductions. This means it will likely exceed the total for the entire 2017-2019 QT cycle by the end of this year or early 2023. Many economists see officials aiming for around $3 trillion in total reduction of the assessment over a three-year period. Read more

MIX OF DIFFERENT CASH

According to data from the New York Fed, the Fed’s Treasury portfolio this time has a shorter maturity than in the previous QT cycle of about two years. This is partly due to substantial purchases of Treasuries, particularly at the start of the crisis, to help restore market stability.

Minutes showed that officials were considering repayments of Treasury bills, which mature in a year or less, when the repayment of coupon securities, which are notes and bonds with a maturity of more than a year , is less than the ceiling. Treasuries are highly valued by private investors and reducing their stock by the Fed would make it easier for the US Treasury to issue them.

Furthermore, officials generally do not view treasury bills as a necessary part of their holdings necessary to ensure an adequate supply of reserves for the banking system under their current operation.

DO YOU SELL THESE HOLIDAY MORTGAGE BONDS?

Minutes showed officials expect MBS buybacks to be below the cap of $35 billion per month. Indeed, mortgage interest rates in the United States have already risen significantly, slowing the pace of “prepayments” that typically occur when rates are low and homeowners have an incentive to refinance their existing loans. This triggers a loan repayment and shortens the term of a mortgage obligation. Conversely, when rates rise, fewer bonds will mature each month.

Officials “generally agreed”, however, that it would be appropriate to consider outright sales of MBS “after the balance sheet liquidation was well underway to allow appropriate progress towards a longer-term portfolio. . composed mainly of Treasury securities”.

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Reporting by Dan Burns; Editing by Andrea Ricci

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