MNI POLICY: Soft Data Calls For Lower Fed Rates Path: Brainard

By Jason Webb

     WASHINGTON (MNI) - Softening U.S. data, a slowdown abroad and recent

financial market volatility may warrant modest downward revisions to the path

for the federal funds rate, Federal Reserve Governor Lael Brainard said

Thursday. 

     Deteriorating spending and sentiment data helped prompt Brainard to revise

down her outlook for the most likely scenario for economic growth, she said,

according to a text of a speech prepared for Princeton University. 

     "Modest downward revisions to the baseline outlook for output and

employment would call for modest downward revisions to the path for our

conventional policy tool, the federal funds rate, helping to offset some of the

weakness that would otherwise weigh on the economy," Brainard said, noting that

heightened downside risks would argue for a softer federal funds rate even if

the most likely outlook for the economy had remained unchanged. 

     Recent labor market data has also showed softening, she said, adding that

she would watch indicators including February payrolls data closely. Uncertainty

over the approval of an increase in the debt ceiling, probably due in the fall,

is also a risk. 

     On the external front, economic hazards include a potential escalation of

trade disputes, the danger of a hard "Brexit", challenges within eurozone

countries such as France and Italy and a potential hard landing in China. 

     Prudence now counsels a period of waiting for the Fed before its next

policy move, especially with no signs inflation is picking up, and it will be

appropriate to wind down redemptions of securities on the central bank's balance

sheet later in the year, Brainard said. 

     Referring to the future composition of the balance sheet, Brainard noted

that the current portfolio is skewed towards longer maturities compared to the

overall market, and added that it might more sense for the Fed to weight its

purchases towards bills and other shorter-dated Treasury securities for a while.

However, this issue is unlikely to be addressed for some time, she said.

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

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