The Federal Reserve is set to begin “rapidly” reducing its $9 trillion balance sheet as early as its next monetary policy meeting in May and is poised to take “stronger” action when it comes to raising interest rates to curb inflation lower, a priority said a Federal Reserve official.
Lael Brainard, who sits on the Fed’s board of governors and is awaiting confirmation from the Senate to become the next vice chair, said Tuesday the central bank’s “most important task” is to dampen the recent rise in consumer prices, which is driving consumer prices down disproportionately burdened low- and middle-income families.
“It is paramount to bring down inflation,” she said in a prepared speech at a conference hosted by the Fed’s Minneapolis office. “Accordingly, the committee will continue to methodically tighten monetary policy through a series of rate hikes and begin reducing the balance sheet at a rapid pace as early as our May meeting.”
She added that the Fed stands ready to take “stronger action” when it comes to tightening monetary policy if economic data warrants it, and suggested tacit support for more aggressive moves, including doubling the pace at which monetary policy is tightened The prime rate is raised and delivered half point increases at upcoming meetings.
Wall Street is increasingly anticipating at least two such adjustments in 2022, when a growing A number of Fed officials have signaled their willingness to move quickly to a more “neutral” policy by the end of the year that will neither support nor slow growth. Estimates of the neutral range range from 2.3 to 2.5 percent.
Stronger measures could also result in an even faster decline in the Fed’s holdings of Treasury bonds and agency mortgage-backed securities, which swelled as the central bank tried to shore up the economy and ensure the smooth functioning of financial markets early in the pandemic.
Chairman Jay Powell suggested that the minutes of the March policy meeting, released on Wednesday, would include details of how quickly that process could proceed. Economists are expecting an eventual pace of $60 billion per month in Treasuries and $45 billion per month in Agency MBS.
Outlining her case, Brainard cited Paul Volcker, the former Fed chairman who in the late 1970s had tamed inflation by aggressively tightening monetary policy, thereby causing a painful recession. He had previously warned that runaway inflation “would pose the greatest threat to continued economic growth. . . and ultimately to employment”.
Those most at risk, she warned, are households with limited resources and tight budgets. In a discussion following her comments, Brainard noted that for a “majority” of workers, consumer price inflation has outpaced wage growth, implying reduced purchasing power.
Brainard warned that Russia’s invasion of Ukraine would put upward pressure on inflation and likely add to already elevated gas and food prices. Supply chain bottlenecks could widen further, especially with new lockdowns announced in China to stem the spread of Covid-19, developments that further underscore the need for the Fed to tighten monetary policy “quickly”.
On Tuesday, a sell-off in the $22k Treasury market accelerated, with the benchmark 10-year Treasury yield rising 0.11 percentage point to 2.5 percent. It was just below a three-year high last month. While longer-dated US Treasuries sold the most, yields on policy-related two-year notes also rose, hitting 2.5 percent.
Yields rise when a bond’s price falls.
US stocks also slipped. The S&P 500 stock index, which was up slightly before Brainard’s speech, closed 1.3 percent lower on the day. The tech-heavy Nasdaq Composite fell 2.3 percent.
Additional reporting by Eric Platt
https://www.ft.com/content/848a70fe-557b-40a0-949b-70acc6ac6905 The Fed will begin a ‘rapid’ balance sheet cut as early as May, a senior official says