Key Fed People Just Scared The Markets: Here’s What They Said

US Federal Reserve Governor Lael Brainard speaks during a confirmation hearing of the Senate Committee on Banking, Housing and Urban Affairs in Washington, DC, US, on Thursday, January 13, 2022.

To Drago | Mayor Bloomberg | fake images

If there was any doubt about the Fed’s position on the key issue of the day, inflation, two top officials provided even more clarity on Tuesday.

federal governor Lael Brainard and San Francisco Fed President Mary Daly issued comments showing they both envision higher rates and, in the case of the former, aggressively reducing the assets the central bank has on its balance sheet.

Investors didn’t particularly like what they heard, sending the main averages considerably lower on the day and the 10-year Treasury yield to a new high of 2022.

“It is extremely important to lower inflation,” Brainard said during a Minneapolis Fed meeting webinar The Federal Open Market Committee, which sets interest rates, “will continue to tighten monetary policy methodically through a series of interest rate hikes and beginning to shrink the balance sheet at an accelerating pace as soon as our meeting of May”.

The comments helped topple a positive open on Wall Street that eventually turned into a nearly 1% loss for the Dow Jones Industrial Average. The Fed’s most aggressive talk also comes as the 30-year fixed mortgage rate. exceeded 5%a key threshold that could slow down the real estate market.

‘We’re not going to let this happen forever’

Later that day, Daly said inflation is at its highest point in 40 years “It’s as harmful as not having a job.” Speaking to the Native American Financial Officers Association, assured the group that the Fed is on the case.

“Most Americans, most people, most businesses, hopefully people in tribal nations, everyone has confidence that we’re not going to let this happen forever,” Daly said. “But if you don’t have that confidence, let me give it to you.”

He assured attendees several times that interest rates are rising, though he added that he doesn’t think that will cause a recession.

Raise rates ‘is the thing to do to bring it back, [you] you go to bed at night, you don’t worry if prices will be higher, considerably higher tomorrow,” Daly added.

The Fed has already enacted its first rate hike of the year, a 0.25 percentage point move in March. Markets expect increases at each of the remaining six meetings this year, possibly totaling 2.5 percentage points.

Two political ‘doves’

What made the two officials’ comments more surprising is that they are considered to be in the Fed’s “dove” camp, meaning they generally favor low rates and less restrictive policies. The fact that both see a rather urgent need to tighten underlines how seriously the Fed is taking the threat.

Brainard’s voice carries a bit of extra weight in the sense that she has been nominated to be vice president of the FOMC, a position that makes her the main lieutenant of the president Jerome Powell.

Brainard said wait the Fed’s $9 trillion balance sheet to “shrink considerably faster” than during the last roundup in 2017-19. In that episode, the Fed allowed $50 billion a month in revenue from maturing bonds to accumulate while reinvesting the rest. His comments opened the door to what many economists expect to be a monthly drop of around $80 billion to $100 billion.

Shrinking the balance “will contribute to monetary policy tightening beyond expected increases in the policy rate,” Brainard added.

“Currently, inflation is too high and subject to upside risks. The Committee stands ready to take stronger action if inflation indicators and inflation expectations indicate such action is warranted,” it added.

Daly echoed the idea that the balance sheet reduction could start in May, adding that the Fed’s commitment to fight inflation “will mean that interest rates will go up.”

“But inflation, what people pay day after day, is on everyone’s mind, they go to bed at night thinking about it, they wake up in the morning thinking about rent, transportation, gas prices, food prices, then we as the Federal Reserve are on track to raise interest rates,” he said.

Previous post What is a hard inquiry and how does it affect credit history?
Next post The verdict is in modern monetary theory, says strategist
%d bloggers like this: