Fed determined to tighten monetary policy against inflation

Posted Apr 6, 2022, 10:14 PMUpdated on Apr 6, 2022 at 10:17 PM

The hard line of the American Central Bank is confirmed. To fight inflation in the United States, the Fed could accelerate its rate hike rate from next month and reduce its balance sheet by up to $ 95 billion per month, according to the minutes of the meeting of central bankers of March, published on Wednesday.

This confirms expectations of a rapid tightening of US monetary policy. This week, U.S. government bond markets experienced a fever pitch after a senior Federal Reserve figure, Lael Brainard, stressed that the institution was determined to continue tightening monetary policy “in a way methodical”.

Inflationary pressures

“Overall, the Fed’s monetary policy committee minutes don’t seem to go any further than what Brainard has already pointed out,” notes ING Bank’s chief international economist, James Knightley.

“Many participants pointed out that one or more increases of 50 basis points (half a percentage point, editor’s note) […] may be appropriate in future meetings, particularly if inflationary pressures remain elevated or intensify,” the minutes read.

War-related uncertainties

In March, the Fed had started to raise its rates, but had opted for a rise of a quarter of a percentage point, bringing its rates back to a range of 0.25% to 0.50%. If the Fed has given up on striking harder, it is in particular because of the uncertainty caused by the invasion of Ukraine by Russia at the end of February, confirm the minutes.

At the same meeting, central bankers expressed support for starting to reduce the size of the balance sheet “at the earliest after the conclusion of their next meeting in May”. The central bank’s balance sheet swelled during the Covid-19 crisis to approach 9,000 billion dollars.

Central bankers discussed whether to cap monthly balance sheet reduction. Overall, they felt it would be appropriate to have monthly portfolio asset reduction caps of $60 billion for US government securities and $35 billion for mortgage-backed securities. (MBS).

At its highest in 40 years, inflation in the United States rose to 6.4% in February according to the PCE index, favored by the Fed, and to 7.9% according to another index, the CPI.

The echoes

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