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The Fed will Reduce Balance Sheet in May

In: Finance, Forex

Governor Lael Brainard participated today in a virtual panel discussion about inflation at an online event hosted by the Federal Reserve Bank of Minneapolis. She discussed what is planned for the following meetings of the FOMC.

The task of reducing inflation pressures is paramount and the central bank will raise interest rates steadily while starting balance sheet reduction as soon as next month.

The Federal Open Market 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 their May meeting.

Official’s next meeting is set for May 3-4. The balance sheet is expected to shrink given that the recovery has been considerably stronger and faster than in the previous cycle, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017–19.

To curb the hottest inflation in four decades, the U.S. central bank ended asset purchases last month and raised interest rates a quarter percentage point, while forecasting at least six more increases for the rest of this year. The significance of balance sheet reduction to the FOMC’s sense of overall tightening is important and it was pointed out by Brainard.

Brainard said, referring to the Fed’s quarterly forecasts: “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,” she also said Russia’s invasion of Ukraine is a “seismic” geopolitical risk and human tragedy that that skews inflation risk to the upside.

The Fed’s 2% inflation target is based on the personal consumption expenditures price index, which rose 6.4% in the 12 months through February. The consumer price index soared 7.9% in February, the most since 1982.

Governor Brainard’s comments suggest she is somewhere near the median estimate of seven rate increases this year, but also prepared to go faster if inflation doesn’t subside.

At the moment, inflation is too high and is subject to upside risks. The committee is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is deemed necessary, stated Brainard during her speech.

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