At their March policy meeting, Federal Reserve officials engaged in nuanced discussions about the management of their $7.5 trillion balance sheet, indicating a preference for a cautious approach to its reduction. Their primary concern was to avoid repeating the experience of the 2017-2019 balance-sheet runoff, which had ended amidst market turbulence.
The minutes from the March 19-20 meeting revealed that Fed officials were inclined towards reducing the monthly pace of balance-sheet reduction by half. This adjustment would involve scaling back the runoff of maturing Treasurys to $30 billion per month, down from the current rate of $60 billion per month. Meanwhile, they intended to maintain the cap on the runoff of mortgage-backed securities at $35 billion per month. This decision reflected the Fed’s strategic shift towards predominantly holding Treasury securities in the long term.
While a minority of Fed officials advocated for maintaining the status quo in terms of the balance-sheet runoff pace, the majority deemed it prudent to initiate a gradual slowdown in the pace of runoff “fairly soon.” This inclination towards moderation underscored their commitment to a measured and deliberate approach to monetary policy adjustments.
Since the onset of the COVID-19 pandemic, the Fed has embarked on an unprecedented asset purchase program, injecting $5 trillion into the economy to bolster economic activity and stabilize financial markets. As part of its normalization efforts, the Fed has been gradually reducing its balance sheet since mid-2022, with approximately $1.5 trillion in assets already removed.
In terms of monetary policy, Fed officials acknowledged the presence of persistently disappointing inflation readings. However, they remained cautious about the timing of interest rate adjustments, preferring to await greater confidence in the trajectory of inflation towards the Fed’s 2% target. Despite expectations for inflation to continue trending downwards, officials noted the potential for an uneven path ahead. Additionally, they discussed the possibility of maintaining current interest rate levels for an extended period should the disinflationary pressures diminish at a slower pace than anticipated.
The release of March’s consumer-price inflation data, which exceeded expectations, has prompted many economists to revise their forecasts, anticipating that the Fed may delay its first rate cut until the third quarter. This unexpected uptick in inflation has reinforced the Fed’s concerns regarding the persistence of elevated price pressures.
At the conclusion of the March meeting, the Fed opted to maintain its policy rate within the range of 5.25% to 5.5%, a level that has remained unchanged since July, reflecting the central bank’s commitment to stability amidst evolving economic conditions.