MNI ANALYSIS: Fed's Brainard Warns on Infl Acceleration Risk

--Trump's Fiscal Stimulus In Hot Economy Treads New Ground 

--Sees Downside Risks for Markets Should Unexpected Event Hit

By Jean Yung

     WASHINGTON (MNI) - The Trump administration's unleashing of fiscal stimulus

at a time the economy is close to full employment and growing at an above-trend

pace could lead to a risk of accelerating inflation or financial imbalances and

bears close watching, Federal Reserve Governor Lael Brainard said Tuesday. 

     In a speech on financial stability at New York University's Stern School of

Business, Brainard drew attention to the nexus of bond yields and asset prices,

saying that while asset valuations are "elevated" by historical standards --

even after the recent stock market correction, the "relatively low" level of

Treasury yields is a "mitigating factor." 

     However, "a sharp increase in concerns about the potential for high

inflation or in uncertainty about policy could boost term premiums on Treasury

securities, which could trigger declines in asset prices across a range of

markets," she said. 

     It's hard to predict how the economy will respond to fiscal stimulus when

the economy is running hot, she said. Unemployment could continue to fall and

reach levels not seen in decades. That has historically led to rising inflation

and financial system vulnerabilities. 

     "It is important to be attentive to the emergence of any imbalances,

because we do not have much experience with pro-cyclical fiscal stimulus at a

time when resource constraints are tightening and growth is above trend," she

said. 

     "In such circumstances, asset prices might be particularly susceptible to

an unexpected development that accentuates downside risks to the macroeconomic

outlook." 

     Overall, financial stability risk remains moderate, she added. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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