America faces a series of rate hikes
Fed Chair Brainard signals series of interest rate hikes and strong balance sheet reductions
Federal Reserve Governor Lael Brainard, who normally advocates loose policy and low interest rates, said Tuesday the central bank must act quickly and aggressively to bring down inflation.
In a speech written for a Minneapolis Fed discussion, Brainard said the policy tightening will involve a rapid reduction in the balance sheet and a steady hike in interest rates. Their comments suggested that the rate hikes could be larger than the traditional 0.25 percentage point moves.
"Inflation is far too high at the moment and poses upside risks," she said in her prepared remarks. "The [Federal Open Market] Committee stands ready to take stronger action when indicators of inflation and inflation expectations suggest such action is warranted."
The Fed has already announced a rate hike: a 0.25% hike at the March meeting, the first in more than three years and likely one of many this year.
In addition, markets are expecting the Fed to unveil a plan to trim nearly $9 trillion of assets, primarily Treasury bills and mortgage-backed securities, from its balance sheet at its May meeting. According to Brainard's statements on Tuesday, this process will proceed quickly.
"The [FOMC] will methodically continue tightening monetary policy through a series of rate hikes and will begin rapid balance sheet reductions as early as our May meeting," she said. “Given that the recovery was significantly stronger and faster than the previous cycle, I expect the balance sheet to shrink much faster than the previous recovery, with significantly larger caps and a much shorter timeframe for cap implementation compared to 2017-19."
Back then, the Fed was withdrawing $50 billion of maturing bond proceeds each month and reinvesting the rest. Markets are anticipating the pace could double this time.
The measures come in response to inflation, which has risen at its fastest pace in 40 years and is well above the Fed's 2% target. Markets expect interest rates to be hiked at each of the remaining six sessions this year, which could total 2.5 percentage points.