The central bank’s balance sheet will be faster, Brynard says

April 5 (Reuters) – Federal Reserve Governor Lale Brynard on Tuesday said he expects interest rate hikes and rapid balance sheet flows to bring U.S. monetary policy to a “more neutral” level later this year. Required.

The central bank released the minutes of its March meeting on Wednesday, which is expected to provide new details on its plans to reduce its bond reserves, and provided a preview of Brinard’s comments.

“I think we can all agree that inflation is very high and that reducing inflation is very important,” Brinard said at a conference in Federer, Minneapolis.

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To do so, he said, the central bank would raise rates “systematically” and begin to cut its nearly $ 9 trillion balance sheet next month, reaching a “significantly” faster flow than in the past. The central bank shrunk its stake.

Rapid portfolio cuts “will contribute to monetary policy tightness above the expected increase in the policy rate reflected in market pricing and the summary of the Committee’s economic forecasts,” he said.

The hawk tone sent shares down from one of the Federal Reserve’s generally worst policy dividers, and the Treasury’s multi – year high returns, investors digested the impacts of a more serious policy path.

Investors are “aggressed by the pace of the central bank and its balance sheet cuts,” said Sam Stowell of CFRA Research.

The central bank last month raised rates for the first time in three years, and released forecasts showing that most policymakers expect the policy rate to end at 1.75% -2% per annum. The remaining six Fed meetings this year will require a quarter-point rate increase.

Markets see the Fed moving fast, offering half-point rate hikes in May, June and July, bringing the rate to 2.5% -2.75% by the end of this year. Most policymakers consider 2.4% to be a “neutral” level, with borrowing costs starting to slow growth.

“Since the recovery was significantly stronger and faster than the previous cycle, I expect the balance sheet to shrink significantly significantly faster than the previous recovery. 2017-19,” Brinard said.

Then, the central bank began to limit the runoff from its $ 4.5 trillion balance sheet to $ 10 billion a month, and it took a year to increase to a maximum of $ 50 billion a month. Analysts expect it to be twice as fast this time around.

More if needed

The central bank is targeting 2% inflation, as measured by the Per capita Consumption Price Index. In February, the PCE price index rose 6.4% from a year earlier, and as Russia’s invasion of Ukraine raises gas and food prices, COYD locks in China worsen supply chain barriers, and it sees further risks, Brynard said.

Although geopolitical events may pose a threat to growth, the U.S. economy is picking up significantly and the labor market is strong, with unemployment now at 3.6%, well above the pre-epidemic level.

The central bank’s signal on policy has already tightened financial conditions, with mortgage rates rising to a full percentage point over the past few months, Brinard said.

“We are prepared to take strong action if it is guaranteed by measurements of inflation or inflation expectations,” Brinard said, adding that he would look into the yield curve if there were any negative risks to the economy.

It is unknown at this time what he will do after leaving the post.

Esther George, president of the Kansas City Fed, supports rapid balance sheet flow and has opened that door.

“I think 50 basic points would be an option, among other things, we have to consider,” George told Bloomberg TV on Tuesday.

Is the recession a concern?

If the central bank raises rates as markets now predict, it will represent the fastest pace of policy tightening in at least a few months to several decades.

Federal Reserve Chairman Jerome Powell says he believes the central bank can manage a “soft landing” that will raise enough borrowing costs to slow the economy and reduce inflation, but not enough to increase unemployment or push the economy into recession.

It is difficult for economists to say, if not impossible: a recent study by Larry Summers of Harvard University noted that since 1955 wage growth has exceeded 5% and the unemployment rate has never been lower than 5%. By recession.

Labor department data shows that hourly wages for non-management employees increased by 6.7% in January, February and March over the previous year.

However, central bank officials argue that the past does not have to be a foregone conclusion. For one thing, workers are already moving away from the labor market as epidemics ease, and that trend will ease wage pressures.

For another, the United States is a net oil exporter, so energy prices will not slow the economy as it did in the 1970s, reducing stagnation.

“I do not expect us to fall into recession,” said Mary Daley, president of the San Francisco Fed Bank.

As the central bank tightens its policy to combat inflation, he said, “we can move slowly, so it looks like we’re approaching it, it’s possible, but it’s a short-term event that I expect, and then we’re coming back.”

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Report by Ann Sapphire and Lindsay Dunsmuir; Additional report by Bansari Mayur Kamdar, Praveen Paramasivam and Rodrigo Campos; Editing by Andrea Richie

Our Standards: Thomson Reuters Trust Principles.

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