A top Federal Reserve official has warned that the Federal Reserve must keep its cool as it attempts to tame rising inflation, putting her name on the list of policymakers to adopt a dovish note on future interest rate hikes pronounce.
Fed Vice Chairman Lael Brainard reiterated expectations that the central bank would opt for a third straight 0.75 percentage point rate hike at its meeting later this month. “We’re in this as long as it takes to bring inflation down,” she said.
Brainard said the Fed has “both the ability and the responsibility” to maintain public confidence in its ability to keep inflation under control over the long term, and that higher interest rates, which constrain the economy, are necessary “for some time.”
Brainard’s vigorous intervention, widely viewed as a policy dove, comes as investors increased bets on the Fed delivering another 75 basis point hike when officials meet on September 21.
Futures markets on Wednesday implied an 81 percent chance they will opt for a hike of that magnitude.
Expectations of further sharp rate hikes have propelled the dollar higher in recent months and contributed to downward pressure on other major currencies.
A measure of the dollar against six other peers is up almost 15 percent in 2022. Sterling has fallen by the same magnitude to hover near its weakest level since 1985. Monetary policy has pushed the yen to its lowest level in 24 years.
Brainard, speaking at a banking industry conference in New York, said the Fed’s recent rate hikes have started to cool some sectors of the US economy. At some point, she said, the central bank will have to consider the risk of overshooting with overly tight monetary policy.
But she added that before the Fed considers easing its efforts to tame higher prices, it needs to see “several months of low monthly inflation readings” and be confident that it’s getting closer to its 2 percent target.
Brainard’s focus on inflation expectations underscored the Fed’s concern that persistently high inflation will lead to a vicious cycle with companies raising prices and workers demanding higher wages. That could force the central bank to take even more aggressive action and cause further economic pain.
But she said events elsewhere could result in lower inflation in the US as Europe faces a weaker economy and “serious energy shortages” while China extends its Covid lockdown measures.
“The disinflationary process here at home should be amplified by weaker demand and tightening in many other countries,” she said.
Brainard said the US job market continues to show “considerable strength” with which it is “difficult to reconcile”. [a] rather somber tone of activity”.
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Shortly after Brainard’s comments, the Fed released its latest Beige Book, an anecdotal assessment of regional economic conditions that found evidence of a tight labor market across the country.
Brainard is the latest Fed official to reinforce the hawkish message delivered by Chairman Jay Powell in Jackson Hole, Wyoming last month. Richmond Fed President Thomas Barkin told the Financial Times this week that he has a “liking” for tightening policy quickly “as long as you don’t accidentally break something.”
Meanwhile, Michael Barr, the Fed’s vice chairman for oversight, said on Wednesday that the risk of allowing inflation to spike is “far greater” than being overly aggressive.
Barr, one of the top banking regulators in the US, also said the Fed will consider “adjustments” to various banking regulations, including stress tests, capital buffers and its system for evaluating bank mergers.
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