Federal Reserve Vice Chair Lael Brainard pledged on Wednesday to continue the fight against inflation, which she says hurts low-income Americans the most.
That will mean more interest rate increases and keeping rates higher for longer, she said in prepared remarks for a speech in New York. Brainard cushioned the remarks by acknowledging that policymakers will be data-dependent and aware of overdoing the tightening.
“We’re here for as long as it takes to bring inflation down,” the central bank official said, just two weeks before the Fed’s next policy meeting. “So far, we have quickly raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further.”
Stocks rallied further after the remarks as investors look for signs that the Fed is committed to lowering inflation without going overboard.
“At some point in the tightening cycle, the risks will become more two-sided,” Brainard added. “The speed of the tightening cycle and its global nature, as well as the uncertainty about the pace at which the effects of tightening financial conditions feed through to aggregate demand, create risks associated with excessive tightening.”
Markets are betting that the Federal Open Market Committee responsible for setting rates will pass its third consecutive 0.75 percentage point hike in benchmark rates when it meets again on September 20-21.
Lael Brainard, Vice Chairman of the U.S. Federal Reserve, speaks during an Urban Institute roundtable in Washington, DC, U.S., Friday, June 3, 2022.
ting shen | Bloomberg | Getty Images
Brainard’s remarks mirror recent comments from several officials who said rates are likely to remain high “for some time” even after the Fed stops climbing. Commitment came from the highest levels of central bank policymakers, including Chairman Jerome Powell and New York Fed Chairman John Williams.
The current federal funds rate is targeted in a range between 2.25% and 2.5% after four consecutive increases by the FOMC this year.
Although inflation has shown signs of plateauing lately, year-over-year increases are near the highest levels in more than 40 years. Supply shocks, record fiscal and monetary stimulus, and the war in Ukraine contributed to this rise.
Without committing to a specific course of action, Brainard said the Fed must remain vigilant.
“With a series of inflationary supply shocks, it is particularly important to hedge against the risk that households and businesses start to expect inflation to stay above 2% in the long term, which would make much more difficult to bring inflation back to our target,” she said.
These inflationary pressures are “especially hard on low-income families” who spend most of their household budget on food, energy and housing costs, Brainard added.
She noted that there is anecdotal evidence of falling prices in retail sectors, as store owners face lower spending due to inflation.
In addition, she said there “could also be scope for reductions” in automotive industry profit margins, which she says are “unusually large” judging by the wholesale price gap. and detail.
Conversely, she said the labor market remained exceptionally strong, with August’s rise in labor force participation a positive sign.
Brainard said policymakers will watch the data closely as the economy slows, hoping to temper inflation along the way.
“Monetary policy will need to be tight for some time to provide confidence that inflation is moving closer to target. The economic environment is highly uncertain and the policy trajectory will depend on the data,” she said. declared.
Fed Chairman Jerome Powell speaks Thursday as the central bank nears its quiet period ahead of the September meeting.