Brainard says the Fed will rapidly reduce its balance sheet as early as May


(April 5): Federal Reserve Governor Lael Brainard called the task of reducing inflationary pressures “paramount” and said the central bank would steadily raise interest rates while beginning balance sheet reduction as soon as possible. next month.

The Federal Open Market Committee “will continue the methodical tightening of monetary policy through a series of interest rate hikes and beginning to shrink the balance sheet at a rapid pace beginning at our May meeting,” Brainard said Tuesday in prepared remarks. for a speech at the Minneapolis Fed.

“Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to contract considerably faster than in the previous recovery, with significantly higher ceilings and a period much shorter to phase in the maximum caps compared to 2017-19,” she added. Officials will meet on May 3-4.

The US central bank ended asset purchases last month and raised interest rates by a quarter of a percentage point, while planning at least six more hikes for the rest of the year to rein in the highest inflation in four decades. Brainard’s comments raised the importance of asset runoff to the FOMC’s overall tightening sentiment.

“The balance sheet reduction will contribute to the tightening of monetary policy beyond the expected policy rate increases reflected in market prices and the committee’s summary of economic projections,” she said, referring to the quarterly forecast of the Fed.

Brainard, who is awaiting Senate confirmation to become vice-chairman of the Fed, said Russia’s invasion of Ukraine is a “seismic” geopolitical risk and a human tragedy that skews inflation risk at the rise.

The consumer price index climbed 7.9% in February, the highest since 1982. The Fed’s 2% inflation target is based on a separate measure, the expenditure price index personal consumption, which rose 6.4% in the 12 months to February.

She spent much of her remarks describing how inflation has diverse impacts on income brackets, with low-income households spending 77% of their income on necessities compared to 31% for higher-income households.

Brainard’s policy comments suggest she’s somewhere near the median estimate of seven rate hikes this year, but is also poised to go faster if inflation doesn’t come down.

“Currently, inflation is far too high and subject to upside risks,” she said. “The committee stands ready to take stronger action if inflation indicators and inflation expectations indicate that such action is warranted.”

“On the other hand, I’m watching for yield curve signals at different horizons and other data that might suggest heightened downside risks to activity,” she said.

Investors are betting that the Fed will hike rates by half a point at its May meeting. Brainard didn’t elaborate on where she stood on that point, and wasn’t asked about it directly during the moderated Q&A that followed her prepared remarks.

But Kansas City Fed President Esther George said a half-point hike will be on the table when policymakers meet next month.

“I think 50 basis points is going to be an option that we have to consider,” she said in a Bloomberg Television interview with Michael McKee. “We have to be very deliberate and intentional when we remove this accommodation.”

(Updates with comments from Fed’s George in last paragraph.)


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