Fed’s brainard sees budget reduction soon and “at a rapid pace”
Lael Brainard, Federal Reserve Governor and President Bidens nominated to be the new Vice President of the Federal Reserve, speaks during his nomination hearing with the Senate Banking Committee on Capitol Hill on January 13, 2022 in Washington, DC.
Drew Angerer | Getty Images
Federal Reserve Governor Lael Brainard, who normally prefers accommodative policy and low rates, said on Tuesday that the central bank needs to act quickly and aggressively to reduce inflation.
In a speech for a discussion by the Minneapolis Fed, Brainard said the tightening of policies will include a rapid budget reduction and a steady pace of interest rate hikes. His comments indicated that rate movements could be higher than traditional movements by 0.25 percentage points.
“Currently, inflation is too high and is subject to upside risks,” he said in prepared remarks. “The Committee is ready to take stronger action if inflation indicators and inflation expectations indicate that such action is justified.”
The Fed has already approved an interest rate hike – a 0.25% hike at its March meeting that was the first in more than three years and probably one of many this year.
Additionally, markets expect the Fed to come up with a plan at its May meeting to reduce some of the nearly $ 9 trillion in assets, primarily Treasury and mortgage-backed securities, on its balance sheet. According to Brainard’s comments on Tuesday, that process will be swift.
“The Committee will continue to methodically tighten monetary policy through a series of interest rate hikes and by starting to reduce the budget at a rapid pace as soon as our May meeting,” he said. “Given that the recovery was noticeably stronger and faster than in the previous cycle, I expect the budget to shrink significantly faster than the previous recovery, with significantly higher ceilings and a much shorter period for phasing in. ceilings compared to 2017-19 “.
At the time, the Fed allowed $ 50 billion in proceeds to be deducted each month 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 running at the fastest pace of the past 40 years, well above the Fed’s 2% target. Market expectations are for a rate hike in each of the remaining six meetings. year, for a total of perhaps 2.5 percentage points.