Fed Vice Chair "More Aggressive Rate Hikes, Quantitative Tightening Next Month"... Sharp Rise in Treasury Yields

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Seulgina Jo] Lael Brainard, nominated as Vice Chair of the U.S. Federal Reserve (Fed), expressed concerns about inflation and signaled a faster and more aggressive path of interest rate hikes. She confirmed that quantitative tightening, including balance sheet reduction, could begin as early as next month. Immediately after, the New York stock market plunged and Treasury yields soared.

Brainard, the Fed Vice Chair nominee, attended a conference hosted by the Federal Reserve Bank of Minneapolis on the 5th (local time) and stated, "Lowering inflation is the most important priority."

She explained, "The Fed will begin balance sheet reduction at a rapid pace immediately after the May meeting (Federal Open Market Committee (FOMC)) and will systematically tighten monetary policy through consecutive interest rate hikes." Regarding balance sheet reduction, she added, "It will be reduced faster than before."

The minutes of this week's FOMC meeting are expected to contain specific details that will confirm the future pace and scope of the Fed’s actions in connection with Brainard’s remarks.

She also reaffirmed that if economic indicators remain strong, the pace of monetary tightening could become faster and more forceful. This is interpreted as a signal that big steps?raising interest rates by 0.5 percentage points at once?may become more frequent. The market expects at least two big steps to be taken this year.

Brainard has been regarded as a representative dove (favoring monetary easing) within the Fed. She emphasized, "Inflation is currently very high and exposed to upside risks," and if inflation indicators worsen, "the FOMC is prepared to take stronger measures."

Additionally, Brainard cited the Ukraine crisis as one of the reasons behind the Fed’s shift toward tightening, predicting that "the Ukraine crisis will lead to increases in energy and grain prices, intensifying inflationary pressures and worsening supply chain disruptions."

Financial markets fluctuated immediately after her remarks. In the bond market, the yield on the U.S. 10-year Treasury note surged to its highest level since May 2019. During the session, the 10-year yield rose to 2.567% before settling around 2.55%. This movement caused the 10-year yield to once again surpass the 2-year yield, which had recently experienced an inversion.

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