Lindsay and Ann Saphir (NYSE:) Dunsmuir

(Reuters) –Lael Brainard, Governor of the Federal Reserve said Tuesday that she expected methodical interest rates increases and rapid decreases in Fed’s balance sheets to help bring U.S. monetary policies to a “more neutral” position later this year. Further tightening will follow as necessary.

Brainard stated that “I believe we can all agree on inflation being too high” and said that bringing it down was of vital importance at the Minneapolis Fed conference.

She stated that the Fed would raise rates “methodically”, and within a month, begin to rapidly reduce its $9 trillion balance sheet. This will allow for a faster pace of runoff, which she claimed is “considerably” greater than when it last shrank its holdings.

The rapid portfolio reductions “will contribute to monetary policy tightening over and above the expected increases in the policy rate reflected in market pricing and the Committee’s Summary of Economic Projections,” she said.

Brainard’s comments, which were her first since last month’s Fed rate hike, sent stock prices down and Treasury yields to new multi-year highs. Investors absorbed the more cautious tone of one Fed policymaker.

According to Sam Stovall, CFRA Research’s analyst Sam Stovall, investors are worried by the Fed’s aggressiveness in reducing its balance sheets.

The March Fed Meeting projections showed that most policymakers expected the policy rate to end the year in the range between 1.75%-2%. If not, this pace would mean quarter-point rate rises at every Fed meeting.

The markets see Fed acting faster. They will increase the Fed’s rate by half-point in May, June, and July to reach 2.5%-2.755% at the end of the year. It would rise above the level of 2.4% that Fed policymakers regard as neutral.

On Wednesday, the Fed released minutes from its March meeting. These documents are expected to give new details about the Fed’s plan to decrease its bond holdings. Brainard offered a little preview.

“Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017–19,” Brainard said.

In those days, the Fed had to limit runoff to its $4.5 trillion balance to $10 million per month. The Fed took over a year to get to $50 billion each month. Analysts predict a rate of around twice the pace this time.

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According to the price index for personal consumption expenditures, the Fed targets inflation of 2%. The PCE price index rose 6.4% in February compared to a year ago.

Brainard indicated that there is upside risk to inflation due to Russia’s invasion in Ukraine and that China COVID lockdowns may worsen supply chain problems that are keeping prices up.

Even though there could be risks for growth from geopolitical events, she pointed out that the U.S. economic has a lot of momentum and that the labor market in America is healthy.

Last month’s unemployment rate was 3.6%. This is just one point above the pre-pandemic peak.

Brainard stated that the Fed has signaled its policy intent to tighten financial conditions. Mortgage rates have risen a full percentage point over the last few months.

Brainard stated that “we are ready to take more action” when warranted by inflation readings or inflation expectations. She also said she will be monitoring the yield curve to identify any downside risks for the economy.

Brainard didn’t say if she believed that faster portfolio runs would eliminate the need for larger rate hikes than usual.

Kansas City Fed President Esther George also supported a quicker balance sheet runoff. She left this door open.

“I think 50 basis points is going to be an option that we’ll have to consider, along with other things,” George told Bloomberg TV on Tuesday.