Federal Reserve Vice Chair Lael Brainard said interest rates will need to stay elevated for a period to further cool inflation that’s showing signs of slowing but is still too high.
“Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis,” Brainard said in prepared remarks Thursday for a University of Chicago Booth School of Business event.
She didn’t explicitly state a preference for whether the Fed should downshift to a quarter-point rate hike at its next decision due Feb. 1, as traders expect. Brainard also didn’t say what peak rate she envisioned this year, with Fed officials’ median forecast at about 5.1% and markets expecting about 4.9% followed by rate cuts in the second half.
Still, her overall message was broadly consistent with other policymakers’ comments that borrowing costs must remain high for a while. At the same time, Brainard discussed signs of cooling inflation and economic activity and suggested that jobs and prices could ease without a big loss of employment.
Brainard said that economic data in the past few months shows cooling consumer demand and wages and tighter financial conditions, all welcome outcomes for policymakers trying to rein in inflation that last year surged to a 40-year high.
Recent Downshift
The Fed raised its benchmark interest rate to a range of 4.25% to 4.5% last year in its fastest hiking campaign since the early 1980s. At their last meeting in December, policymakers slowed down the pace of increases to a half-percentage-point pace, following four consecutive 75 basis-point rises.
The downshift “will enable us to assess more data as we move the policy rate closer to a sufficiently restrictive level, taking into account the risks around our dual-mandate goals,” Brainard said.
The median forecast in Fed officials’ December projections showed the fed funds rate would rise to 5.1% this year, and policymakers have noted that they’ll then need to hold it there for some time to give it time to transmit to the rest of the economy.
“It is likely that the full effect on demand, employment, and inflation of the cumulative tightening that is in the pipeline still lies ahead,” Brainard said. “That said, there is uncertainty about the timing and magnitude.”
Inflation figures showing slowdowns in the prices of services excluding housing — a sector closely watched by Fed officials — along with goods minus food and energy, plus well-anchored inflation expectations, all indicate that the economy is unlikely to enter a wage-price spiral that will drive up prices in an uncontrolled way, Brainard said.
“For these reasons, it remains possible that a continued moderation in aggregate demand could facilitate continued easing in the labor market and reduction in inflation without a significant loss of employment,” Brainard said.
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