Brainard Offers Broadly Dovish Speech

Headlines that the Fed needs 'sufficiently' restrictive' policy for some time belied a broadly dovish speech from VC Brainard across a number of areas, including full effects of tightening only being felt ahead as some prior accommodation offset initial tightening.

• Mon pol lags: “The drag on U.S. growth and employment from monetary policy is likely to increase in 2023 because of transmission lags from the rapid, large swing from accommodation to restraint in 2022. […] Given the speed and magnitude of the swing in the stance of monetary policy, the lagged effects of earlier accommodation likely offset some of the initial effects of tightening over the course of 2022, and it is likely that the full effect on demand, employment, and inflation of the cumulative tightening that is in the pipeline still lies ahead.”
• Softer labor market indicators: “Recent declines in average weekly hours, temporary-help services [a good leading indicator], and monthly payrolls growth suggest tentative signs that labor demand is cooling.”
• “The continued decline in average weekly hours is notable because this margin is among the easiest to adjust by firms facing declining demand, especially those who may be reluctant to undertake layoffs”
• Persistent components of inflation steadily declining: “There is some recent evidence that the persistent components of inflation in core goods and nonhousing services, particularly transportation, recreation, and food services and accommodation, have behaved similarly, peaking around early 2022 and steadily declining since then.”
• Weaker on savings than some other FOMC members: “Savings among low-income households appear to be lower and to have declined more rapidly than was previously appreciated”