The US Federal Reserve (Fed) is ready to tighten its monetary policy even more resolutely in the fight against inflationary pressures than the markets had previously expected.

Fed Director Lael Brainard announced Tuesday (local time) at a Federal Reserve conference in Minneapolis a series of interest rate hikes and rapid balance sheet reductions.

The latter is scheduled to start in May and is a bad signal for bond investors because the US Federal Reserve will then dump debt it has been buying over the past few years.

Brainard's statements triggered a sell-off on the American bond market on Tuesday.

Markus Fruehauf

Editor in Business.

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The yield on the ten-year Treasury rose by up to 0.16 percentage points, which is the largest jump in yields since the Corona crash in March 2020.

On Wednesday, the 10-year yield hit 2.633 percent, a three-year high.

The interest on the two-year paper rose to its highest level since January 2019, the five-year yield was as high as it was in December 2018. The yield on the ten-year federal bond was 0.633 percent on Wednesday.

"It's paramount to keep inflation down," Brainard said.

Fed balance sheet of $9 trillion

Brainard emphasized that the balance sheet, which inflated to almost $9 trillion during the Corona crisis, is being reduced at a much faster rate than in the last contraction from 2017 to 2019.

Fed Chair Jerome Powell has previously indicated that the Fed could start trimming its balance sheet in May.

The markets are hoping for insight into the plans from the minutes of the most recent interest rate meeting, which will be published this Wednesday.

The European Central Bank (ECB) is also tightening monetary policy in view of the rise in inflation to a record level of 7.5 percent in March.

The head of the Belgian central bank, Pierre Wunsch, is calling for interest rates to be raised before the end of this year in view of the high level of inflation.

The deposit rate, which has been minus 0.5 percent since 2014, could be raised to zero at the end of 2022, Wunsch told the Belgian magazine Knack.

It was actually a sure-fire success for him.

However, he had to admit that there had been no discussion within the ECB about raising interest rates.

Wunsch joins a number of ECB central bankers who have hinted that a rate hike may be on the agenda soon.

These include the central bank governors of Germany, Austria and the Netherlands.

On the other hand, ECB chief economist Philip Lane is sticking to his expectation that inflation will probably have peaked in the middle of the year with the easing of the energy price shock.

As he told Greek TV channel Antenna TV, the inflation rate will decrease in the second half of the year.

Lane expects lower inflation rates in the coming year and the year after.

New era of inflation

On the other hand, the General Director of the Bank for International Settlements (BIS), Agustín Carstens, warned of a new era of inflation.

After decades of very low inflation rates and expansive policies, he sees the central banks on the verge of a paradigm shift and an orientation towards higher interest rates.

In his speech in Geneva on Tuesday evening, Mexico's former finance minister and central bank governor said: "We must not assume that inflationary pressures will abate any time soon." The BIS, which is considered the bank of central banks, manages foreign exchange reserves for central banks and also serves as one monetary policy think tank.

Carstens considers it possible that the inflation environment is currently changing fundamentally.

Here he also refers to globalization, which has declined during the pandemic.

The new geopolitical constellations, such as the Ukraine war, are also forcing companies to think about the risks in their international value chains.