Fed considers reducing balance sheet by $95B per month, but what could it mean for your wallet?

Fed on track to continue raising interest rates

The Federal Reserve released its minutes, which showed it will continue reducing its balance sheet and raising interest rates.  (iStock)

The latest minutes from the Federal Reserve’s March meeting released last week indicated that the central bank is planning to further decrease its bond holdings while continuing to raise interest rates in order to combat rising inflation.

The Fed voted during that meeting to raise the federal funds rate by 25 basis points, to a target range of 0.25% to 0.5%. The move marked the first interest rate hike since 2018, and the Fed also indicated that more rate hikes will take place soon. The Federal Open Market Committee's (FOMC) minutes also revealed the Federal Reserve is discussing reducing its balance sheet — the amount of stimulus it’s putting into the economy — by $95 billion per month. 

"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 Fed minutes stated. "Participants also generally agreed that the caps could be phased in over a period of three months or modestly longer if market conditions warrant."

If the Fed reduces its balance sheet, it would cause interest rates to rise. If you are interested in taking advantage of interest rates before they increase further, consider refinancing your private student loans to lower your monthly payment. Visit Credible to find your personalized interest rate without affecting your credit score.


Interest rates to continue rising, according to FOMC

Interest rates are rising, but the Federal Reserve expects to continue increasing rates through 2022 and 2023, according to the meeting minutes. The FOMC explained that in order to combat inflation, such rate hikes would continue to be necessary.

In February, inflation surged to another 40-year high, rising 7.9%. The rate marked a third consecutive increase and also topped records set each of the two months prior. Treasury Secretary Janet Yellen told CNBC during a March 10 interview that Americans will "likely" see "uncomfortably high" inflation numbers over the course of 2022.

"The committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run," the Fed minutes stated. "With appropriate firming in the stance of monetary policy, the committee expects inflation to return to its 2% objective and the labor market to remain strong. In support of these goals, the committee decided to raise the target range for the federal funds rate to 0.25% to 0.5% and anticipates that ongoing increases in the target range will be appropriate."

The direction of interest rates on mortgages, student loans, personal loans and more are determined with the help of the federal funds rate. 

As the federal funds rate rises, it will continue to push interest rates higher at a faster pace. The average 30-year mortgage rate, for example, is rapidly nearing the 5% mark. Homeowners looking to lower their monthly payments could consider refinancing their mortgage. Credible can help you compare lenders and find the best refinance rate for your financial situation.


Russian invasion of Ukraine creates high economic uncertainty: Fed

During its March meeting, Fed officials noted positive economic growth despite pressures of high inflation. However, there was one factor that participants said was creating high levels of uncertainty for the American economy: Russia’s invasion of Ukraine. 

"Participants noted that indicators of economic activity and employment had continued to strengthen," the minutes stated. "Job gains had been strong in recent months, and the unemployment rate had declined substantially. Inflation remained elevated, reflecting continued supply and demand imbalances, higher energy prices, and broader price pressures. With appropriate firming in the stance of monetary policy, participants expected inflation to return to the committee’s 2% objective over time and the labor market to remain strong. 

"Participants recognized that the invasion of Ukraine by Russia was causing tremendous human and economic hardship for the Ukrainian people," the minutes continued. "They judged that the implications of the war for the U.S. economy were highly uncertain, but in the near term, the invasion and related events were likely to create significant additional upward pressure on inflation and could weigh on economic activity."

As the Fed continues to fight surging inflation, consumers can take advantage of current interest rates before they rise even more by visiting Credible. From there, they can lock in favorable rates now on mortgages, personal loans and more.

Have a finance-related question, but don't know who to ask? Email The Credible Money Expert at moneyexpert@credible.com and your question might be answered by Credible in our Money Expert column.