NEW YORK, Feb 21 (Reuters) - The Federal Reserve’s internal debate over the fate of its balance sheet reduction effort looks set to intensify at policymakers' next meeting in March, with some of the key contours of the discussion now coming into view.

Minutes of the central bank’s Jan. 30-31 Federal Open Market Committee meeting, released on Wednesday, showed "many participants" eager to kick off "in-depth discussions" at their March 19-20 meeting on how they will conclude what has been a steady reduction in the Fed’s bond holdings.

The minutes showed officials viewed the ongoing rundown as moving forward without issue. And with cash draining steadily out of a key central bank tool viewed as a proxy for excess financial sector liquidity, officials said they were ready for a full-scope debate over how to eventually slow the process commonly referred to as quantitative tightening, or QT, at their March FOMC meeting.

The Fed more the doubled the size of its holdings starting in March 2020 to a peak of nearly $9 trillion, using bond purchases to stabilize markets and provide stimulus beyond the near zero federal funds rate then in place. The current size of the Fed's balance sheet is $7.7 trillion.

Some Fed officials said at the January meeting that amid uncertainty over how much liquidity the financial system needs, slowing the pace of the contraction could be a good idea. The minutes said “a few” policymakers believe QT can proceed “for some time” even after the Fed starts cutting its short-term interest rate target.

The Fed has been lowering the size of its holdings since 2022. It is allowing up to $95 billion in Treasury and mortgage bonds to expire each month and not be replaced.

The QT process complements Fed rate hikes aimed at cooling high levels of inflation. With price pressures heading back to the 2% target Fed officials are openly weighing when they can lower the federal funds target rate from its current 5.25% to 5.5% level. (Reporting by Michael S. Derby; Editing by Andrea Ricci)