Fed minutes December 2021:

The Federal Reserve at its December meeting began plans to begin cutting the amount of bonds it holds, with members saying a reduction in the balance sheet is likely to start sometime after the central bank begins to raise interest rates, according to the minutes released Wednesday.

Although officials did not make a decision on when the Fed will begin rolling out the nearly $ 8.3 trillion in government bonds and mortgage-backed securities it has, statements from the meeting indicated that the process could begin in 2022, possibly in the coming months.

“Almost all participants agreed that it would probably be appropriate to start balancing at some point after the first increase in the target area for the federal funds rate,”[ads1]; the meeting summary states.

The market’s expectations are currently that the Fed will start raising the reference rate in March, which will mean that the balance reduction can start before the summer.

The minutes also indicated that when the process starts, “the appropriate pace of balance runoff will probably be faster than it was during the previous normalization episode” in October 2017.

The size of the Fed’s balance sheet is significant because the central bank’s bond purchases have been considered a key element in keeping interest rates low while increasing the financial markets by keeping money flowing.

Wall Street reacted negatively to the news, with equities falling and government bond yields rising with the prospect of a tighter Fed in 2022.

Fed officials have repeatedly said during the meeting that they believe the ultra-simple guidelines introduced in the early days of the Covid-19 pandemic were no longer justified or justified. The members of the committee addressed the main pillars of their dual goals and expressed concern about rising inflation, while saying that they see the labor market approaching full employment.

“They did more than talk about this. It was obviously a pretty long discussion. This was a pretty serious conversation,” said Kathy Jones, chief strategist at Charles Schwab, about the minutes, which had a special section entitled “Discussion.” for political normalization reasons. ”

“The fact that almost all participants agreed that it was appropriate to start the balance run after the first increase in the target area for the Fed funds rate, means that there is not much appetite for ‘let’s wait and see.'” Last time they wanted two years. This time, it looks like they’re ready to go. “

During the 2017-19 reduction, the Fed allowed a limited level of income from the bonds it has to roll out each month, while reinvesting the rest. The Fed started by letting Treasury and mortgage-backed securities fall to $ 10 billion every quarter, and increasing by as much each month until the limits reached $ 50 billion.

The program was intended to reduce the balance sheet considerably, but was short-circuited by global economic weakness in 2019, followed by the pandemic crisis in 2020. In total, the reduction amounts to only around 600 billion dollars.

As expected, after the meeting in December, the Fed’s policy-making group kept its reference rate anchored close to zero. However, officials also indicated that they expect up to three-quarters of a percentage point increase in 2022, as well as a further three increases in 2023 and two more until the following year.

Officials at the meeting indicated that inflation meters “had been higher and were more persistent than previously expected.” While a member said they believe growth will be “robust” in 2022, they also said that inflation poses a strong risk, perhaps even more so than the pandemic.

Consequently, they said it would be time to tighten policy faster than expected.

“Some participants felt that a less accommodating future policy would probably be justified, and that the committee should convey a strong commitment to meet increased inflationary pressures,” the minutes said.

In this way, the committee announced that it would increase the phasing out of the monthly bond purchase program. According to the new plan, the program was to end around March, after which it would free the committee to start raising interest rates.

Current pricing of futures fund futures markets indicates a 2-to-1 chance of the first increase in March, according to CME’s FedWatch Tool. Traders expect the next increase to come in June or July, followed by a third move in November or December.

Fed officials indicated that the rationale behind the movements was a response to higher and more persistent inflation than they had anticipated. Consumer prices are rising at the fastest pace in almost 40 years.

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