MNI POLICY:Fed's Brainard:Above-Neutral Rates Likely Warranted

By Jean Yung

     WASHINGTON (MNI) - U.S. interest rates may need to rise gradually above

current estimates of their longer-run neutral level in the next few years to

support economic growth and keep employment healthy and inflation stable,

Federal Reserve Governor Lael Brainard said Wednesday.

     With fiscal stimulus providing "tailwinds to demand" over the next two

years, it's reasonable to expect the shorter-run neutral rate to rise "somewhat

higher" than the longer-run nominal neutral rate, currently estimated to be

around 2.5% to 3.5%, Brainard said.

     Brainard's argument mirrored her earlier calls for possibly applying

so-called "restrictive" levels of rates, though she avoided any mention of the

word in her remarks prepared for the Detroit Economic Club in Detroit, Mich. The

Federal Open Market Committee in June saw rates rising just above 3% by 2020.

     Growth is robust, the labor market and inflation are currently meeting the

Fed's objectives, Brainard said, and a gradual path of rate hikes is most

appropriate to keep the expansion going.

     Tax cuts and spending increases, as well as heightened risk appetite among

investors, tend to push up the shorter-run neutral rate, which fluctuates with

economic conditions and is the most relevant benchmark for how the Fed sets

policy in the near term, Brainard said.

     "These developments raise the prospect that, at some point, the Committee's

setting of the federal funds rate will exceed current estimates of the

longer-run federal funds rate," Brainard said. "Indeed, the median projection in

the SEP has this property."

     The Fed governor acknowledged that raising rates above neutral "raises the

possibility of a flattening or inversion of the yield curve" in the event that

term premiums do not rise from their currently very low levels.

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

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