Lael Brainard, Governor of the Federal Reserve and President Bidens’ nominee for the new Vice Chairman of the Federal Reserve, speaks during his nomination hearing with the Senate Banking Committee on Capitol Hill on January 13, 2022 in Washington, DC.
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Federal Reserve Governor Lael Brainard, who normally favors loose policy and low rates, said on Tuesday the central bank needed to act quickly and aggressively to bring inflation down.
In a speech for a Minneapolis Fed discussion, Brainard said policy tightening will include rapid balance sheet reduction and a steady pace of interest rate increases.
“Inflation is far too high and is subject to upside risks,” she said in prepared remarks. “The Committee stands ready to take stronger action if inflation indicators and inflation expectations indicate that such action is warranted.”
The Fed has already approved an interest rate hike: a 0.25% hike at the March meeting, the first in more than three years and likely one of many this year.
Additionally, markets expect the Fed to outline a plan at its May meeting to cut some of the nearly $9 trillion in assets, mostly Treasuries and mortgage-backed securities. , on its balance sheet. According to Brainard’s comments on Tuesday, this process will be quick.
“The 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 as soon as we meet in May,” she said. “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.”
At the time, the Fed allowed $50 billion in revenue each month to be withdrawn from maturing bonds and reinvested the rest. Market expectations are that the pace could double this time around.
The moves are in response to inflation at its fastest pace in 40 years, well above the Fed’s 2% target. Market expectations are for rate increases at each of the remaining six meetings this year, which could total 2.5 percentage points.