Fed’s Brainard Says Balance Sheet Reduction to Happen Rapidly

Current inflation is “much too high” and getting it down is of “paramount importance,” Federal Reserve Governor Lael Brainard said in a speech Tuesday.

“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,” Brainard said in a speech at the Federal Reserve Bank of Minneapolis.

The speech comes a day before the Federal Open Market Committee (FOMC) will release minutes of its March 15-16 meeting in which members decided to raise the federal funds rate by 25 basis points (0.25 percentage point) in order to bring down inflation – currently at 7.9%. This could provide further details of the central bank’s plan to reduce its holdings of Treasury securities and mortgage bonds.

While there is no proven correlation between the cryptocurrency market and inflation, recent market movements following the release of economic indicators suggest that at least some bitcoin traders react to traditional economic data.

Before the Fed announced that it would raise interest rates on March 16, bitcoin (BTC) was trading around $40,335. Following the announcement, the largest cryptocurrency by market cap has been on a steady increase, currently meandering around $45,900, according to data from Messari.

The Federal Reserve last reduced its balance sheet in 2018, after its assets quadrupled following the financial crisis in 2008. The minutes could reveal how high the Fed plans to set monthly caps for the amount of securities that mature in order to secure a smooth reduction.

Brainard, who currently awaits Senate confirmation to serve as the Fed’s vice chair, said that those caps would be much larger than during the reduction that followed the financial crisis.

“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,” Brainard said.