Federal Reserve Governor Lael Brainard, who usually supports easing policy and low interest rates, said on Tuesday (5th) that the Fed needs to act quickly and aggressively to bring down inflation.
Brainard, speaking at the Minneapolis Fed discussion, said policy tightening would include a rapid balance sheet reduction and steady rate hikes.
“Inflation is too high and there are upside risks,” she said in a prepared remarks. “The committee is prepared to take more forceful action if measures of inflation and inflation expectations suggest action is warranted.”
The Fed has already approved a rate hike: 0.25 percentage point at its March meeting, the first in more than three years, but likely just one of several hikes this year.
In addition, the market expects the Fed to lay out a plan at its May meeting to shrink some of the nearly $9 trillion in assets on its balance sheet, mainly U.S. Treasuries and mortgage-backed securities (MBS). That process will be quick, according to Brainard’s comments on Tuesday.
“The Committee will continue to methodically tighten monetary policy through a series of rate hikes and begin rapid balance sheet reduction as soon as possible at its May meeting,” she said. “Considering that the economic recovery is stronger and faster than the previous cycle, I expect the balance sheet to shrink much faster than the previous recovery, which was significantly larger and for a much shorter period of time compared to the last cycle, 2017-2019.”
Last cycle the Fed allowed to recover $50 billion in monthly proceeds from maturing bonds and reinvest the rest. Markets are expecting a doubling of the magnitude this time around.
Prices rose by the most in 40 years, well above the Fed’s 2% target. The market expects rate hikes in all six meetings before the end of this year, with a total of 2.5 percentage points possible.