Fed’s Brainard Anticipates Balance Sheet Reduction At Fast Pace

Lael Brainard | Federal Reserve’s

Federal Reserve’s Lael Brainard on Tuesday said that the federal reserve needs be proactive and act quickly to curb an increasing inflation.

Brainard said that policy tightening will include a fast reduction in the balance sheet and a consistent interest rate increases. Her comments hints at the possibilities higher rate increases than the conventional increments of 0.25 percentage point.

She said, “Currently, inflation is much too high and is subject to upside risks. The [Federal Open Market] Committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted.”

The Federal Reserve has already approved one interest rate hike of 0.25% at the March meeting.

Markets anticipate the central bank to lay out a plan at its meeting in May for reduction on its balance sheet. Brainard’s comments hint at the swift process in that direction.

Brainard added, “The FOMC will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting. Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017-19.”

The moves are due to inflation running at its fastest speed in last four decades and it is above the Federal Reserve’s 2% target. There are possibilities of increases in interest rate at all six remaining meetings this year, totaling 2.5 percentage increase overall.

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