MNI POLICY: Brainard Prefers Fed Patience Over Preemptory Move

Federal Reserve Governor Lael Brainard on Tuesday stressed patience on removing monetary policy support as the Covid recovery speeds up this year, citing labor slack and "entrenched inflation dynamics" that will likely keep prices low after a temporary blip higher.

As the economy reopens fully, a release of pent-up demand could drive stronger growth in 2021 "than we have seen in decades" and push up prices in the process, she told a virtual business economists conference.

But, "Entrenched inflation dynamics are likely to take over following the transitory pressures associated with reopening," she said, noting that underlying trend inflation has been running persistently below 2% for many years and "recent decades provide little evidence to suggest there will be a material nonlinear effect on price inflation."

"While the outlook has brightened considerably, with jobs nearly 10 million below the pre-COVID level and inflation persistently below 2 percent, the economy remains far from our goals, and it will take some time to achieve substantial further progress," she said.

"Policy should be patient rather than preemptive at this stage in the recovery," she said.

INFLATION DASHBOARD

With inflation expected to rise above 2% "on a transitory basis," Brainard said she will be monitoring closely a dashboard of indicators "to assess that inflation expectations remain well anchored at levels consistent with the Committee's objective."

These indicators include survey and market-based measures, along with composite measures like the Fed staff's Index of Common Inflation Expectations.

Survey measures have recently picked up a little but remain around pre-COVID levels, while five- and 10-year TIPS-based measures of inflation compensation have moved up almost 1pp since last summer and are now at levels last seen in 2013 and 2014, she said.

"These changes likely reflect both the improvement in the anticipated outlook and market participants' understanding of the Committee's new reaction function," she said.