The Fed released minutes of its March meeting on Wednesday, which are expected to provide new details about its plans to cut its bonds, and Brainard’s remarks provided a brief preview. “I think we can all absolutely agree that inflation is very high and reducing inflation is paramount,” Brainard told a Minneapolis Fed conference. Sign up now for FREE unlimited access to Reuters.com Register To do this, he said, the Fed will raise interest rates “methodically” and, just next month, will begin to cut its balance sheet to nearly $ 9 trillion, quickly reaching a “significantly” faster outflow rate than last year. The Fed is shrinking its holdings. The rapid portfolio cuts “will help tighten monetary policy beyond the expected policy rate hikes reflected in market pricing and the Commission’s Summary of Economic Outlook,” he said. The aggressive tone of one of the Fed’s usually most despised policymakers has driven stocks down and government yields high for many years as investors assimilate the consequences of a more aggressive policy. Investors are worried about “the speed and aggression of the Fed with its balance sheet cuts,” said Sam Stovall of CFRA Research. The Fed raised interest rates last month for the first time in three years and released forecasts showing that most policymakers believed the policy rate would end the year at at least 1.75% -2%, if not higher. That would require quarterly interest rate hikes in all six remaining Fed meetings this year. Markets are seeing the Fed move faster, raising interest rates by half a point in May, June and July to bring the interest rate to 2.5% -2.75% by the end of this year. Most policymakers see 2.4% as a “neutral” level, above which borrowing costs begin to slow growth. “Given that the recovery was much stronger and faster than in the previous cycle, I expect the balance sheet to shrink significantly faster than in the previous recovery, with significantly higher ceilings and a much shorter phase time to peaks. ceilings compared to 2017–19 “, said Brainard. At the time, the Fed was beginning to limit the outflow from its $ 4.5 trillion balance sheet to $ 10 billion a month, and it took a year to raise it to a maximum of $ 50 billion a month. Analysts expect a rate about twice that of this time. MORE IF NEEDED The Fed is aiming for 2% inflation, as measured by the personal consumer price index. In February, the PCE price index rose 6.4% from a year earlier, and Brainard said it saw risks rising further as Russia’s invasion of Ukraine pushed up gas and food prices and lockdowns in China is exacerbating bottlenecks in the supply chain. And while geopolitical events could pose growth risks, he noted, the US economy has significant momentum and the labor market is strong, with unemployment now at 3.6%, just a hair above pre-pandemic level. . The Fed’s policy signal has already tightened economic conditions, Brainard said, with mortgage rates rising by a full percentage point in recent months. “We are ready to take stronger action” if justified by inflation readings or inflation expectations, Brainard said, adding that it would also monitor the yield curve for any signs of declining risk to the economy. It was not clear from Brainard’s observations whether he believed that a rapid outflow of portfolio would make larger than usual rate hikes unnecessary. Kansas City Fed Chairman Esther George, who also supports a faster balance sheet outflow, has left that door open. “I think the 50 basis points will be an option we need to consider, among other things,” George told Bloomberg TV on Tuesday. DOES THE REVOLUTION CONCERN? If the Fed really raises interest rates as fast as the markets now predict, that would mean the fastest policy tightening in decades, at least for a few months. Fed Chairman Jerome Powell says he believes the Fed can handle a “soft landing” in which the central bank raises borrowing costs enough to slow the economy and reduce inflation, but not enough to boost unemployment or to push the economy into recession. Economists say this will be difficult, if not impossible: in a recent paper, Larry Summers of Harvard University noted that since 1955 there has never been a time when wage increases exceeded 5% and the unemployment rate was below 5% that was not followed within two years of recession. Hourly wages for non-managers increased by 6.7% from January last year, February and March last year, according to data from the Ministry of Labor. Fed officials, however, say the past is not necessarily a prelude. First, workers are already out of the labor market as the pandemic subsides, and more of this trend could ease wage pressures. For another, the United States is a net exporter of oil, so rising energy prices will not slow the economy as much as it did in the 1970s, making stagnant inflation less likely. “I do not expect to be in recession,” Mary Daley, president of the Fed Bank of San Francisco, told a meeting of the Association of Native American Businessmen in Seattle. As the Fed tightens its anti-inflation policy, it said, “We could slow down, it looks like we’re getting close to it. Sign up now for FREE unlimited access to Reuters.com Register Report by Ann Saphir and Lindsay Dunsmuir. Additional references by Bansari Mayur Kamdar, Praveen Paramasivam and Rodrigo Campos. Edited by Andrea Ricci Our role models: The Thomson Reuters Trust Principles.
