MNI: Fed's Brainard Sees Series Of Hikes, Faster QT Phase-In

Federal Reserve Governor Lael Brainard Tuesday said she expects a series of interest-rate increases and balance sheet reduction as soon as the May FOMC meeting, with significantly larger caps and a much shorter period to phase in the maximum caps compared with after the financial crisis.

"It is of paramount importance to get inflation down," she said, noting inflationary pressures have been broadening out. "Accordingly, the Committee 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."

"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," she said, noting the current recovery has been stronger and faster. "The reduction in the balance sheet will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and the Committee’s Summary of Economic Projections."

"I expect the combined effect of rate increases and balance sheet reduction to bring the stance of policy to a more neutral position later this year, with the full extent of additional tightening over time dependent on how the outlook for inflation and employment evolves," she said, in prepared remarks for a Minneapolis Fed event on the unequal impacts of inflation.

Brainard, whose nomination as vice chair at the Fed is still being considered by the Senate, said every indicator of longer-term inflation expectations lies within the range of historical values consistent with the Fed's 2% target, but on the other side she is attentive to signals from the yield curve at different horizons and from other data that might suggest increased downside risks.

The global commodity supply shock associated with Russia’s actions skews inflation risks to the upside, she said, and the recent COVID lockdowns in China are also likely to extend bottlenecks. "These geopolitical events also pose downside risks to growth. That said, the U.S. economy entered this period of uncertainty with considerable momentum in demand and a strong labor market," she said.