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Fed’s Brainard sees rapid balance sheet runoff, rise to neutral

Federal Reserve Governor Lael Brainard on Tuesday said she sees a methodical interest rate increments and quick reductions to the Fed’s balance sheet to bring U.S. money-related policy to a “more neutral position” later this year, with additional tightening to follow as needed.

“I think we can all absolutely agree inflation is too high and bringing inflation down is of paramount importance,” Brainard said at a conference at the Minneapolis Fed.

To do as such, she said, the Fed will raise rates “methodically” and when one month from now start to rapidly ramp up reductions to its almost $9 trillion balance sheet to a “significantly” more fast speed of spillover than the last time the Fed shrank its holdings.

The rapid portfolio reductions “will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and the Committee’s Summary of Economic Projections,” she said.

Brainard’s comments, her first since the Fed last month raised rates without precedent for three years, sent stocks down and Treasury yields up to long-term highs as financial backers processed the hawkish tone from one of the Fed’s typically more tentative policymakers.

Investors are worried by “the speed and aggressiveness of the Fed with its balance sheet reductions,” said CFRA Research’s Sam Stovall.

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