The Vice President of the Fed, Lael Brainardsaid on Tuesday that the entity is prepared to take stronger action if the inflation outlook and indicators of inflation expectations suggest the need for such actionas reported by Reuters.
“The combined impact of rate hikes and balance sheet reduction will move monetary policy to a more neutral stance later this year,” Brainard continued, noting that “once monetary policy becomes more neutral, the degree of tightening will depend on the evolution of the outlook for inflation and employment”.
“The Fed will methodically tighten monetary policy through a series of rate hikes,” Brainard said, and “will start reducing the size of the balance sheet at an accelerated rate as soon as the May meeting is held.” The official expects the balance sheet to shrink at a considerably faster pace than during the previous recovery.
On inflation, Brainard noted that “it is too high and subject to upside risks”. Meanwhile, he noted that Russia’s invasion of Ukraine and recent Covid-19 lockdowns in China are likely to widen supply chain bottlenecks and also pose downside risks to growth.
Lael Brainard said he is watching the yield curve and other data for suggestions of further downside risks to activity, before noting that long-term inflation expectations remain within normal ranges. He added that he is monitoring the extent of the shift from goods to services demand and whether the services sector can absorb this without triggering inflationary pressures.
Finally, Brainard acknowledged that the burden of inflation on lower-income households, those with more household members, or older citizens is not necessarily captured in official consumer price indices.
market reaction
Brainard’s comments appear to have stoked an aggressive reaction in US markets, with traders citing his warning that rapid balance sheet reduction could start as soon as May.
US 10-year bond yields have risen a few basis points in the past few minutes to return above 2.50% and are awaiting a test of multi-year highs set on March 28 in the 2.557%. 2-year yields also rose a few basis points to just under 2.50%.
Stocks did not like his statement. The S&P 500 was trading 0.2% higher at 4590 before Brainard’s comments, but is now down more than 0.5% on the day and trading at 4550.
Source: Fx Street
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