Fed ready to accelerate rate hikes, shrink balance sheet by $95 billion per month

Minutes of the Federal Reserve's March meeting released on Wednesday showed that the Fed is ready to raise interest rates at a faster pace to combat widespread inflation in the United States.

The minutes said many participants at the Fed's March meeting noted that given high inflation, they would prefer a 50 basis point increase in the federal funds rate.

The Fed raised its benchmark interest rate by 25 basis points to a range of 0.25%-0.5% last month, its first rate hike since 2018. Only St. Louis Fed President James Bullard favored a 50 basis point increase at the March meeting.

Fed Chairman Jerome Powell said at last month's meeting that inflation has climbed to its highest level in 40 years and the Fed needs to "act quickly."

Central bank officials were also wary of further price increases due to Russia’s invasion of Ukraine. “Higher energy and food prices weighed on consumer confidence and led to a tightening of financial conditions, with the invasion having a negative impact on growth prospects,” the minutes said.

Expectations for a bigger rate hike at the May meeting have risen following a more modest hike in March, and expectations were further heightened after the release of the minutes on Wednesday.

The Fed said it is also preparing to shrink its massive balance sheet, which became bloated during the pandemic stimulus. Starting in May, the Fed may reduce its holdings of U.S. Treasury bonds and mortgage-backed securities by as much as $95 billion a month.

The minutes "send a warning shot to people who think the Fed is going to be more dovish in its fight against inflation," said Quincy Krosby, chief equity strategist at LPL Financial. "The message they send is, 'You're wrong.'"

Indeed, policymakers have become increasingly strident in recent days about curbing inflation.

Fed Governor Lael Brainard said on Tuesday that lowering prices will require a combination of steady rate hikes and aggressive balance sheet reduction. The market expects the Fed to raise interest rates by a total of 250 basis points this year. The minutes noted that "all participants demonstrated their strong commitment and determination to take the necessary steps to restore price stability."

"The reality is that a 50 basis point rate hike is on the table, and more than one hike is actually possible," said Seth Carpenter, chief global economist at Morgan Stanley.

Stocks fell after the Fed released its minutes, with the Dow Jones Industrial Average falling 200 points, or 0.6%. The S&P 500 fell 1% and the Nasdaq Composite fell 2.1%. Bond rates continued to soar in anticipation of a rapid rise in interest rates. The 10-year Treasury yield rose to 2.62%, hitting a three-year high.