Inflation is running very hot and could move up even higher, necessitating steady interest rate increases and a shrinking of the balance sheet, Federal Reserve Board Governor Lael Brainard said Tuesday.
“Currently, inflation is much too high and is subject to upside risks,” Brainard said, in a speech at a conference sponsored by the central bank’s regional bank in Minneapolis.
“It is of paramount importance to get inflation down,” Brainard added.
To bring inflation down, the Fed 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.
“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 said.
The Fed is “prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted,” she said.
Brainard has been one of the dovish members of the Fed’s policy committee, so her hawkish tone is notable.
Some observers, like former Fed Governor Lawrence Lindsey, think inflation might cause the economy to sink into a recession. Others believe Fed rate hikes will cause an economic downturn.
Some yields on short-term securities are higher than those on longer-term securities. This is called an inversion of the yield curve and some analysts think it is a harbinger of recession.
Brainard said the U.S. economy had good momentum but added she was watching the yield curve and other data that might suggest downside risks to growth.
See also: Fed’s George says 50 basis point hike is an option for early May meeting
Brainard has been nominated by President Joe Biden to be No. 2 job at the U.S. central bank. The full Senate has not yet acted on her nomination but it is not very controversial and she is expected to be confirmed to the 4-year post.
Brainard devoted some of her speech to discussing how high inflation is placing more of a burden on low- and moderate- income Americans than average households.
Research on the topic was still in its infancy, she noted.
Still, lower-income households spend 77% of their income on necessities — more than double the 31% of incomes spent by higher-income households.
Food and energy costs hit lower income Americans hard because they spend 26% of their income on food and transportation, compared with 9% for higher-income Americans.
Poorer workers can’t shift to buying bargain brands because most likely they already are purchasing them, Brainard said. And they often can’t take advantage of lower online prices.
“That is why getting inflation down is our most important task, while sustaining a recovery that includes everyone. This is vital to sustaining the purchasing power of American families,” Brainard said.
U.S. stocks were mixed in early trading with the Dow Jones Industrial Average
DJIA,
up slightly. The yield on the 10-year Treasury note
TMUBMUSD10Y,
broke above 2.5% after Brainard’s speech.
