U.S. Federal Reserve Governor Lel Brainard speaks Thursday, January 13, 2022 during a confirmation hearing of the Senate Banking, Housing and Urban Affairs Committee in Washington, DC, USA.
Al Drago | Bloomberg | Getty Images
If there was any question about the key issue of the Federal Reserve Day – inflation – where two key officials brought more clarity on Tuesday.
Fed Gov. Lyle Brainard and San Francisco Fed President Mary Daly have both issued comments that show they both envision higher rates and, in the former case, an aggressive drop in the assets held by the central bank on its balance sheet.
Investors did not particularly like what they heard, sending the major averages significantly lower on the day and the 10-year Treasury yield reached a new 2022 high.
“Reducing inflation is crucial,” Brainard Minneapolis told the Fed Webinar. The Federal Open Market Committee, which sets interest rates, said it will continue to tighten monetary policy systematically by raising interest rates in a series of ways and by rapidly reducing our balance sheets with our May meeting.
The comments helped knock out a positive opening on Wall Street that eventually led to a loss of about 1% for the Dow Jones Industrial Average. The more aggressive Fed chat also comes as the 30-year fixed mortgage rate is at 5%, a key threshold that could slow the housing market.
Later in the day, the Daily said inflation was at a 40-year high, “as bad as not having a job.” Speaking to the Native American Finance Officers Association, he assured the group that the Fed was involved in the case.
“Most Americans, most people, most businesses, hopefully people from tribal countries, you all have confidence that we won’t let it go forever,” Daly said. “But if you don’t have that confidence, let me give it to you.”
He assured the audience several times that interest rates were going up, although he added that he did not think it would cause a recession.
Increasing the rate “It is necessary to confirm again, [you] Go to bed at night, you don’t have to worry about the price being too high tomorrow, “he added.
The Fed has already implemented its first rate hike of the year, a 0.25 percentage point move in March. Markets expect growth in each of the six remaining meetings this year, perhaps a total of 2.5 percentage points.
What makes the remarks of the two officials more interesting is that they are considered to be in the Fed “dove” camp – which means they are generally in favor of lower rates and less restrictive policies. The fact that they both take the Fed threat seriously sees a rather urgent need to tighten the underscore.
There is a little extra height in Brainard’s voice that he has been nominated as the Vice Chairman of the FOMC, a position that makes him the top lieutenant of Chairman Jerome Powell.
Brainard said he expects the Fed’s $ 9 trillion balance sheet to shrink “faster enough than the last rounddown in 2017-19.” In that episode, the Fed allowed বাক 50 billion a month in income from mature bonds while reinvesting the rest. His comments have opened the door for many economists to expect a monthly roll-off of about $ 80 billion to $ 100 billion.
Reducing the balance sheet “will contribute to tightening monetary policy above and beyond the expected increase in policy rates,” Brainard added.
“Currently, inflation is much higher and the opposite is true. The committee is ready to take stronger action if the indicators of inflation and inflation expectations indicate that such action is needed, “he added.
Daly echoed the notion that balance sheet cuts could begin in May, adding that the Fed’s promise to fight inflation “means interest rates will rise.”
“But inflation, everyone remembers what people are giving day by day, they go to bed at night thinking about it, waking up in the morning, rent, transportation, gas prices, food prices, so we as human beings. The Federal Reserve is on track to raise interest rates, “he said.