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Lael Brainard, a Fed governor who was appointed by President Biden to serve as vice chair, said she thinks a “series” of rate hikes is...


Credit…Al Drago for The New York Times

Federal Reserve officials are unifying around a plan to steadily raise interest rates starting in March, then act quickly to reduce the central bank’s large bond holdings as policymakers seek to cool the economy. economy at a time of rapid inflation.

Policymakers have spent the past week broadcasting that the interest rate hike they plan to make at their March meeting – a hike that investors are already expecting central bankers to make as they are trying to rein in the price rises – will be the first in a series of rate moves. Central bankers also appear to be converging on a plan to quickly start reducing the Fed’s holdings of government-backed debt, which have been increased significantly during the pandemic downturn as the Fed has bought up bonds in a bid to keep markets functioning and protect the economy.

The central bank has purchased $120 billion in Treasury and mortgage-backed securities through much of 2020 and 2021, but officials have been decreasing these purchases and are on the right track to stop them completely in March. By pivoting quickly to allow securities on its nearly $9 trillion balance sheet to expire without reinvestment — reducing its holdings over time — the central bank would remove a major source of demand for government-backed debt. and drive up the rates on those securities. It would work with a higher Fed policy interest rate to make many types of borrowing more expensive.

Higher borrowing costs are expected to weigh on lending and spending, temper demand and help slow price increases, which have been uncomfortably rapid. New data released this week is expected to show further acceleration in the central bank’s favorite inflation gauge, which is already running at its fastest pace in 40 years.

Lael Brainard, a Fed governor who was appointed by President Biden to serve as vice chair, said last week that she believed a “series” of rate hikes was warranted.

“I anticipate that it will be appropriate at our next meeting, which will be in a few weeks, to initiate a series of rate increases,” she said Friday at a forum hosted by the Booth School. of Business from the University of Chicago in Chicago. New York. Ms. Brainard said the Fed would then turn to reducing its balance sheet, a process it may be appropriate to begin “at future meetings.”

Michelle Bowman, another Fed governor, echoed that balance sheet reduction could begin imminently, saying in a monday speech that the Fed must begin to reduce the size of its bond holdings “in the coming months”.

The precise timing of the balance sheet contraction is a matter of debate. John C. Williams, president of the Federal Reserve Bank of New York, suggested on Friday that the process could begin”Later this year”, which could suggest in the coming months or a little later. But officials have been uniformly clear that a pullback is coming, and likely faster than investors had expected until recently.

Although Fed policymakers plan to reduce their holdings of Treasuries and mortgage-backed securities by allowing the securities to expire without reinvesting them, rather than actively selling the debt, the bank’s latest report central suggested meeting minutes that officials could eventually switch to outright sales of mortgage-linked securities. The minutes also suggested officials believed a “significant reduction” in the size of the balance sheet would be warranted.

The central bank’s planned measures would be a rapid pace of change from the last time it raised interest rates, from 2015 to the end of 2018. Afterwards, officials reduced the balance sheet only gradually and drives up interest rates coldly, once a quarter at the earliest.

Borrowing costs have already started to rise as investors adjust to the Fed’s faster plans. The markets are waiting six or seven quarter-point interest rate hikes this year. The rate on a 30 year mortgage has fallen from around 2.9% last fall – when the Fed began its policy pivot – to 3.9% now.

The Fed’s policy changes will “reduce inflation over time, while maintaining a recovery that includes everyone,” Brainard said, adding that when the Fed signals it will raise rates, “the market is clearly aligned with that”.

Still, with rapid inflation, strong wage growth and many signs of tight labor markets, some Fed officials worry the central bank will need to act even faster.

Ms. Bowman, for example, said she was still open to a half-percentage-point hike in March — something her colleague James Bullard, president of the Federal Reserve Bank of St. Louis, also suggested.

“I will be watching the data closely to judge the appropriate size of an increase at the March meeting,” Ms Bowman said.

But Mr Bullard, who has repeatedly said he would prefer to see rates rise a full percentage point of rate increases by July, also noted that he would defer to Chairman Jerome H. Powell, on the size of the initial increase. . And other members of the Fed’s Policy Setting Committee have suggested they don’t think it’s necessary to start with a half-point hike, suggesting a smaller hike may be more likely. .

“There’s really no kind of compelling argument that you have to be faster early on,” Mr. Williams, chairman of the mighty Federal Reserve Bank of New York, told reporters last week.

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