Fed’s Brainard sees balance sheet reduction soon and ‘at a rapid pace’

During her hearing before the Senate Banking Committee, Capitol Hill, January 13, 2022, Lael Brainard (Federal Reserve Governor and Presidential Bidens’ nominee for the role of Vice-chair) speaks.
Drew Angerer | Getty Images

Lael Brainard of the Federal Reserve, who is known for his loose policies and low interest rates, stated Tuesday that the central bank must act fast and aggressively in order to reduce inflation.

Brainard spoke at a Minneapolis Fed meeting and stated that tightening policy will involve a quick reduction in the balance sheets as well as steady interest rate increases. Brainard’s comments suggested that the rate increases could go beyond 0.25 percentage points.

In prepared remarks, she stated that “currently inflation is too high” and was subject to upside risk. “The [Federal Open Market]If inflation indicators and inflation expectations suggest that stronger action is necessary, the Committee will be prepared to act.

Already, the Fed has authorized one increase in interest rates: a 0.25% hike at the March meetingIt was the first of its kind in three years, and is likely to be the last.

Markets expect that the Fed will present a plan for reducing some of its assets (primarily Treasurys, mortgage-backed securities) at its May meeting. Brainard on Tuesday commented that the process of reducing assets, primarily Treasurys and mortgage-backed securities, will take place quickly.

“The [FOMC]”We will tighten monetary policy methodically by increasing interest rates and reducing the balance sheet rapidly as soon as we meet in May.” she stated. The recovery was much faster and stronger than expected, so I expect that the balance sheet will shrink significantly more quickly than it did in 2017. There are also larger caps, and the phase-in period for the maximum caps to be shorter than 2017,-19.

The Fed then allowed $50 billion each month in proceeds from maturing bonds to be rolled off and the remainder was reinvested. The market expects that this pace will double.

This is due to inflation running at its highest pace in over 40 years and well above the Fed’s 2% target. The market expects rate hikes at six of the next six meetings, potentially totalling 2.5 percentage points.

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