MNI: Brainard- ‘Restrictive’ Fed Eyeing Wage Growth Moderation

Federal Reserve policy is already in restrictive territory though the effects of rapid monetary tightening have not yet totally permeated the economy and policymakers are watching the path of wages closely, Fed Vice Chair Lael Brainard said Thursday.

“The FOMC moved policy into restrictive territory at a rapid pace and subsequently downshifted the pace of increases in the target range at its most recent meeting. This will enable us to assess more data as we move the policy rate closer to a sufficiently restrictive level, taking into account the risks around our dual-mandate goals,” she said.

The Fed is widely expected to lower the size of its rate hikes further at its Feb. 1 decision. While Brainard did not specify any such preference, many of her colleagues already have.

“Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2% on a sustained basis,” she said in prepared remarks to an event at the University of Chicago’s Booth School. (See MNI: Fed Rates Likely Headed Above 5% Despite Cooling CPI)

Brainard noted “tentative signs” that wage growth, which Fed Chair Powell has said is currently at levels that are not consistent with price stability, is starting to ease , pointing to softer growth in average hourly earnings.

“I will be watching to see whether the employment cost index data at the end of this month show the deceleration from the third quarter continuing into the fourth quarter," she said.

Brainard said that the speed and size of the Fed’s more than four percentage points of rate hikes last year mean “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.”