MNI: Fed’s Brainard Sees Restrictive Policy For Some Time

The Federal Reserve's aggressive interest rate increases are gradually working their way through the economy but additional tightening is needed to make sure price pressures are brought under control, and policy will need to be tight for a while, Fed Vice Chair Lael Brainard said Monday.

“Monetary policy will be restrictive for some time to ensure that inflation moves back to target over time,” Brainard said in prepared remarks to the National Association for Business Economics. “It will take time for the cumulative effect of tighter monetary policy to work through the economy broadly and to bring inflation down.”

Brainard didn’t reveal her preference for the path of rate hikes but said “market and policymaker surveys indicate additional increases through the end of this year and into next year.”

The Fed is attentive to spillover effects from its own policies and from the rapid tightening of other central banks on the global economy, she said. The Fed has hiked rates by 300 basis points since March, and hiked by 75 basis points a meeting in the last three policy decisions. Another 75bp hike is widely expected in November.

GLOBAL TIGHTENING

“The combined effect of concurrent global tightening is larger than the sum of its parts. The Federal Reserve takes into account the spillovers of higher interest rates, a stronger dollar, and weaker demand from foreign economies into the United States, as well as in the reverse direction,” she said.

“And we are also very aware that the cross-border effects of unexpected movements in interest rates and exchange rates, as well as worsening external imbalances, in some cases could interact with financial vulnerabilities.” (See: MNI INSIGHT: Fed Sees Fin. Stability As Separate From Rates)

Brainard said she takes comfort in both market- and consumer-based measures suggesting longer-run inflation expectations are still well contained.

She said the labor market remains very strong by most metrics, but added there are “tentative signs of rebalancing” there, including some decline in vacancies and moderation in payrolls employment growth. “Anecdotal reports suggest the availability and retention of workers are improving."

Real interest rates are finally getting to levels that will allow the Fed to bring constrained supply and strong demand back into balance, Brainard said.

“The real yield curve is now in solidly positive territory at all but the very shortest maturities, and the entire real curve will soon move into positive territory with the additional tightening and deceleration in inflation that are expected over coming quarters,” she said.