Federal Reserve Flags Rate Hike “Soon”, Plans for Balance Sheet Reduction

Posted on 01/26/2022


The Federal Reserve signaled a rate hike is on the table for March 2022 as Federal Reserve Chairman Jerome H. Powell discussed the challenges of a post-pandemic economic recovery.

“I would say that the committee is of a mind to raise the federal funds rate at the March meeting, assuming that the conditions are appropriate for doing so,” Powell said at a news conference following the meeting.

“The economy no longer needs sustained high levels” of monetary policy support, he said earlier in his remarks.

According to the FOMC’s statement, “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Beginning in February, the Committee will increase its holdings of Treasury securities by at least $20 billion per month and of agency mortgage‑backed securities by at least $10 billion per month. The Federal Reserve’s ongoing purchases and holdings of securities will continue to foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.”

In another statement on January 26, 2022, called, “Principles for Reducing the Size of the Federal Reserve’s Balance Sheet”, it states, “The Federal Open Market Committee agreed that it is appropriate at this time to provide information regarding its planned approach for significantly reducing the size of the Federal Reserve’s balance sheet. All participants agreed on the following elements:

The Committee views changes in the target range for the federal funds rate as its primary means of adjusting the stance of monetary policy.

The Committee will determine the timing and pace of reducing the size of the Federal Reserve’s balance sheet so as to promote its maximum employment and price stability goals. The Committee expects that reducing the size of the Federal Reserve’s balance sheet will commence after the process of increasing the target range for the federal funds rate has begun.

The Committee intends to reduce the Federal Reserve’s securities holdings over time in a predictable manner primarily by adjusting the amounts reinvested of principal payments received from securities held in the System Open Market Account (SOMA).

Over time, the Committee intends to maintain securities holdings in amounts needed to implement monetary policy efficiently and effectively in its ample reserves regime.

In the longer run, the Committee intends to hold primarily Treasury securities in the SOMA, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.

The Committee is prepared to adjust any of the details of its approach to reducing the size of the balance sheet in light of economic and financial developments.”

Keywords: Federal Reserve System.

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