May 17, 2022

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Fed Chairman Brainard expects balance sheet cuts soon and 'at a rapid pace'

Fed Chairman Brainard expects balance sheet cuts soon and ‘at a rapid pace’

Lyle Brainard, Federal Reserve Governor and President Bidens’s nominee for the new Fed Vice Chair, speaks during her nomination hearing with the Senate Banking Committee on Capitol Hill on January 13, 2022 in Washington, DC.

Drew Angerer | Getty Images

Federal Reserve Governor Lyle Brainard, who usually favors loose policy and low interest rates, said Tuesday that the central bank needs to act quickly and aggressively to bring down inflation.

In a speech at a Federal Reserve Board discussion in Minneapolis, Brainard said the tightening of policy would include a rapid reduction in the balance sheet and a steady pace of interest rate increases. Her comments indicated that price moves could be higher than the traditional moves of 0.25 percentage points.

“Currently, inflation is very high and is subject to upside risks,” she said in prepared remarks. “The committee is prepared to take stronger action if inflation indicators and inflation expectations indicate that such action is justified.”

The Fed has already approved one rate increase: It rose 0.25% at the March meeting This was the first in over three years and will likely be one of many this year.

In addition, markets expect the Fed to lay out a plan at its May meeting to dispose of some of the roughly $9 trillion in assets, primarily Treasuries and mortgage-backed securities, on its balance sheet. According to Brainard’s comments on Tuesday, this process will be swift.

“The committee will continue to tighten monetary policy systematically through a series of interest rate increases and start shrinking the balance sheet at a rapid pace as soon as we meet in May,” she said. “Given that the recovery has been much stronger and faster than in the previous cycle, I would expect the balance sheet to shrink much more quickly than in the previous recovery, with much larger extremities and a much shorter period of development in the caps compared to 2017-19.” .

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At the time, the Fed allowed $50 billion in proceeds to be rolled over each month from maturing bonds and reinvested the rest. Market expectations are that the pace may double this time around.

The moves come in response to inflation, which is at its fastest pace in 40 years, well above the Fed’s 2% target. The market expects price increases at each of the remaining six meetings this year, possibly totaling 2.5 percentage points.