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Brainard believes labor market can be as strong or stronger than before pandemic.
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The Federal Reserve is nearing the point where the labor market justifies reducing its USD120 billion monthly QE program but remains a long way from lifting interest rates, Governor Lael Brainard said Monday.
"Employment is still a bit short of the mark on what I consider to be substantial further progress. But if progress continues as I hope, it may soon meet the mark," she said in a prepared speech to the National Association for Business Economics.
Brainard also downplayed the idea that the next job report will be make-or-break for a decision on tapering because the figures are distorted amid school closures and other pressures related to Covid. "As a result of Delta, the September labor report may be weaker and less informative of underlying economic momentum than I had hoped," she said. Excluding Covid disruptions to participation, unemployment is 7.5%, she estimated.
Interest rate hikes aren't at hand despite Fed forecasts showing more hawkish projections after the September policy meeting, she suggested. "The forward guidance on maximum employment and average inflation sets a much higher bar for the liftoff of the policy rate than for slowing the pace of asset purchases," Brainard said.
She pushed back against the notion that maximum employment might not recover its pre-pandemic strength. "Some observers argue that labor force participation has moved permanently lower, and the labor market is already tight, such that we should not expect a return to pre-COVID employment conditions," she said. "But the decline in labor force participation appears to reflect COVID-related constraints that have been prolonged by Delta rather than permanent structural changes in the economy."
Inflation pressures will be transitory despite higher-than-expected readings in recent months, Brainard said. "While inflation has been well above target for the past six months, affecting consumers and businesses alike, it previously spent roughly a quarter century below 2%," she said. There are upside price risks around housing, for some goods and with wages, she said.
"There are good reasons to expect a return to pre-COVID inflation dynamics due to the underlying structural features of a relatively flat Phillips curve, low equilibrium interest rates, and low underlying trend inflation."