Fed's Brainard says balance-sheet trimming to start 'soon'

A senior Fed official said that the central bank would “soon” begin to trim its balance sheet, but she hinted that the recent downturn in inflation could scupper plans to raise interest rates once more this year.

Lael Brainard, a member of the Federal Reserve’s board of governors, told a conference held at the New York Fed on Tuesday that starting cautious shrinkage of the central bank’s bond holdings was imminent.

As long as the labour market stays strong and activity carries on firming, it will be appropriate to start the “gradual and predictable process of allowing the balance sheet to run off”, she said.

However Ms Brainard struck a more questioning note about the merits of further rate increases. She indicated that she was perturbed by the recent dip in US inflation data, which could spur the Fed to scrap its plan to tighten monetary policy once more this year.

She argued that the neutral level of the federal funds rate was likely to stay at zero in real terms over the medium term. This means the Fed may “not have much additional work to do” in lifting its target range to a more neutral stance.

“I will want to monitor inflation developments carefully, and to move cautiously on further increases in the federal funds rate, so as to help guide inflation back up around our symmetric target.”