MNI POLICY: Fed's Brainard: To Proceed Cautiously; Infl Muted

By Jean Yung

     WASHINGTON (MNI) - The Federal Reserve should move cautiously in adjusting

policy, given low neutral interest rates and inflation below target, Fed

Governor Lael Brainard said Thursday. 

     She again called for the central bank to guard against financial imbalances

through the active use of countercyclical tools such as the countercyclical

capital buffer. 

     "In my view, it is therefore wise to proceed cautiously, helping to sustain

the expansion and further gains in employment and with appropriate regulatory

safeguards that reduce the risk of dangerous financial imbalances."

     The following are other major points from her remarks prepared for a

National Tax Association forum in Washington: 

     --Underlying trend inflation appears to be somewhat below the Fed's 2% goal

and raises the risk that inflation expectations fall. 

     --The Fed could take advantage of a mild period of above-target inflation

to reinforce its message that it is serious about achieving its 2% goal. 

     --Low inflation and low real neutral rates are a challenge for monetary

policy, as there is little policy room to lower rates in a downturn. 

     --Extended periods of above-potential growth and low interest rates

encourages a reach for yield and may cause elevated financial imbalances.

Monetary policy might not be able to "restrain the financial cycle" as well as

it has in the past. 

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

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