Brainard Says Fed to Shrink Balance Sheet Rapidly as Soon as May
Comment of the Day

April 05 2022

Commentary by Eoin Treacy

Brainard Says Fed to Shrink Balance Sheet Rapidly as Soon as May

This article from Bloomberg may be of interest to subscribers. Here is a section:

Federal Reserve Governor Lael Brainard called the task of reducing inflation pressures “paramount” and said 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 our May meeting,” Brainard said on Tuesday in remarks prepared for a speech to the Minneapolis Fed. 

“Given that the recovery has been considerably stronger and faster than in the previous cycle, 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 added. Officials next meet May 3-4.

Eoin Treacy's view

Quantitative tightening causes deflation. Everywhere it has been tried, that has been the result. If you have an inflationary problem, sucking liquidity out of the system is a good way to get it under control. Arguably, it is much more effective than raising rates. In the process, demand will fall, and growth will deteriorate. It will also reduce the number of interest hikes that need to be enacted.

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