Fed Officials Reinforce Message That Rates Are Heading Higher

(Bloomberg) -- Federal Reserve policy makers on Wednesday said officials would continue to tighten monetary policy, ahead of a key disclosure expected to shed light on how quickly they plan to trim the central bank's bloated balance sheet.

“I expect a series of deliberate, methodical hikes as the year continues and the data evolve,” Philadelphia Fed President Patrick Harker told the Delaware State Chamber of Commerce on Wednesday. “I also anticipate that we will begin to reduce our holdings of Treasury securities, agency debt, and mortgage-backed securities soon.”

Long-awaited details of how officials plan to proceed on shrinking the Fed's $8.9 trillion balance sheet are expected when the central bank publishes minutes of its March 15-16 policy meeting at 2 p.m. in Washington.

U.S. central bankers began to remove pandemic emergency stimulus last month, raising the benchmark lending rate by a quarter point to a range of 0.25% to 0.5% and penciling in seven increases for all of 2022 to confront the hottest inflation in four decades. Chair Jerome Powell has said they could begin to start allowing their asset holdings to run off as early as May. 

In addition, remarks on Tuesday by Fed Vice Chair nominee Lael Brainard that they could move rapidly on asset rolloff helped sent yields on 10-year Treasury notes sharply higher, as investors digested what they viewed as a more hawkish tone from the typically dovish policy maker, who is awaiting Senate confirmation to become vice chair. 

Her comments were the latest to affirm the Fed's commitment to tackling price pressures that have surged way above their 2% target and look likely to stay too elevated after Russia's invasion of Ukraine pushed the cost of food and energy higher.

Richmond Fed President Thomas Barkin separately told the Central Maryland Chamber on Wednesday that officials could move faster on rate increases if needed to get inflation under control.

“We have moved at a 50-basis-point clip in the past and we could certainly do that again if it is necessary to prevent inflation expectations from unanchoring,” Barkin said. “I'd say it is a judgment call.”

Powell has previously said a 50 basis-point increase was on the table for the Fed's May-3-4 meeting if needed and investors have leaned into that bet, according to pricing in interest-rate futures markets which also show around another 220 basis points of tightening this year.

Bother Harker and Barkin tempered their remarks by noting the risk that officials push too hard on the policy brakes and tip the economy into recession -- a concern that's been flagged by economists and also potentially indicated by the inversion of certain segments of the U.S. Treasury yield curve -- a traditional harbinger of economic downturns in the past.

“We do need to cool the economy a little bit, not take it into recession, not even close, but cool the housing market a little bit,” Harker said. “But we don't want to overdo it. This is where we in the policy world are trying to thread this needle, of getting inflation under control but not stomping on the brakes so hard that we create real problems on the other side.”

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