Federal Reserve Gov. Lael Brainard said she expects policy to return “to a more neutral position later this year.”
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Tech stocks and bond markets both sold off on Tuesday. Blame comments from Federal Reserve Gov. Lael Brainard.
In a Tuesday speech, Brainard said “it is of paramount importance to get inflation down,” and highlighted the urgency of tightening policy quickly. She also said the central bank will start to reduce the size of its balance sheet “at a rapid pace as soon as [its] May meeting.”
U.S. central bankers currently don’t plan to sell bonds from the Fed’s $8 trillion portfolio—they have assured investors they will allow bonds to mature without reinvesting the principal, much like they did in 2017. But on Tuesday, Brainard said she expects its bondholdings “to shrink considerably more rapidly than in the previous recovery.”
That sent long-dated Treasury yields sharply higher (and prices lower). The 10-year yield jumped 14.5 basis points, or hundredths of a percentage point, to 2.554% on Tuesday. The
30-year yield rose 10.9 basis points to 2.582%.
Brainard discussed the recent increase in long-dated Treasury yields as a sign of the Fed’s success in tightening policy. Those yields “tend to be most relevant for household and business decision-making,” she said, citing the increase in the cost of 30-year mortgages. The Fed’s bondholdings are seen as a way for it to directly influence long-dated Treasury yields: Its biggest holdings are in notes and bonds maturing in 2 years or longer. Its outlook for its interest-rate policy, on the other hand, affects short-dated…