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In the minutes of the latest interest rate meeting on March 15 and 16, which were released overnight, the US Federal Reserve announced that it would rapidly tighten its monetary policy. According to the minutes, many members of the Open Market Committee considered that one or more interest rate increases of 50 basis points would be appropriate in the future. Many members were already in favor of a “double interest rate step” when the interest rate was raised in March.
Additionally, the Federal Reserve plans to shed $95 billion per month from its bloated balance sheet. That would mean the Fed would shrink its balance sheet about twice as fast as it did during its last tightening phase, which lasted until 2018. Of that amount, about $60 billion a month is expected to go to Treasury cuts and $35 billion to mortgage bonds. The upper limits for the reduction of total assets will be “phased in gradually over a period of three months or slightly longer,” according to the minutes. Members of the Open Market Committee largely agreed on these modalities, it is said. The reduction in total assets is mainly due to the fact that the proceeds from the bonds and mortgage securities are no longer reinvested when they mature. The mortgage securities could also be sold at a later date.
Officially, the reduction in the balance total must be decided when the interest rate decision is made in May.
When the interest rate decision was made on March 16, the Fed raised interest rates for the first time since 2018. As expected, the key interest rate was raised by 25 basis points and is now in a range. between 0.25 and 0.50 percent. The Fed is determined to establish price stability, Fed Chairman Powell said at the news conference.
The “dot plot” released with the interest rate decision showed that members of the Fed’s Open Market Committee expect a median interest rate of 1.88 percent by the end of the year. This would correspond to another six rate hikes of 25 basis points each. A base rate of 2.8 percent is promised for both the end of 2023 and the end of 2024, which is slightly above previous market expectations. This would correspond to another four rate hikes in the coming year, also of 0.25 percentage points each.
Following the interest rate decision, several central bankers had already promised a swift tightening of US monetary policy, such as Fed Vice President-designate Lael Brainard this week and former central bank chief, Jerome Powell.
market reactions: After the US stock market was able to rally briefly immediately after the release of the minutes, there was a significant sell-off and new daily lows in the major indices. Gold and EUR/USD also showed a weaker trend.
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