The Federal Reserve signaled that it could raise interest rates by 50-basis points in coming meetings and start to reduce its massive balance sheet at a pace of $95 billion a month as it seeks to cool the hottest inflation in four decades.
Minutes from the U.S. central bank's March 15-16 meeting released on Wednesday show that "many" policymakers would have preferred a larger rate increase last month but determined that a more modest quarter-point hike would be appropriate "in light of greater near-term uncertainty associated with Russia’s invasion of Ukraine."
"Many participants noted that one or more [half-percentage-point] increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified," the minutes said.
Policymakers also proposed shrinking the Fed's nearly $9 trillion balance sheet at a maximum monthly pace of $60 billion in Treasurys and $35 billion in mortgage-backed securities. By comparison, the Fed trimmed its balance sheet at a rate of $50 billion a month from 2017 to 2019.
"Participants generally agreed that monthly caps of about $60 billion for Treasury securities and about $35 billion for agency MBS would likely be appropriate," the meeting minutes said. "Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant."
Officials are expected to approve the balance-sheet reduction – and possibly raise rates by 50-basis points – at their next gathering on May 3-4.
Fed policymakers voted during their two-day meeting to raise rates by 25-basis points, bringing to an end the ultra-easy monetary policy put in place two years ago to prop up the economy through the COVID-19 pandemic. They also projected at least six more, similarly sized increases over the course of this year.
But in the weeks since then, policymakers – including Chairman Jerome Powell – have floated the possibility of a more aggressive trajectory amid concerns that the central bank waited too long to begin tightening policy.
"If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so," Powell said two weeks ago. "And if we determine that we need to tighten beyond common measures of neutral and into a more restrictive stance, we will do that as well."
Traders are now pricing in more than a 70% chance of a hefty half-point rate jump when policymakers meet next month, instead of a more modest quarter-point increase, according to the CME's FedWatch tool.
It would mark the first time since 2000 that the U.S. central bank raised the federal funds rate by 50 basis points.
"The minutes did indicate that a hawkish Fed is clearly ready to lift rates by 50 basis points in one or more meeting going forward as the central bank prepares to shift into a higher gear in its policy normalization process," RSM chief economist Joseph Brusuelas said.