Fed’s Brainard urges caution on rate rise

Posted on September 12, 2016

Lael Brainard, center, governor of the Board of Governors of the Federal Reserve System, speaks with activists Angela McCall, right, with MORE, Missourians Organizing for Reform and Empowerment, and Kendra Brooks, of Action United of Philadelphia, following a forum before the opening night reception at the annual invitation-only conference of central bankers from around the world at Jackson Lake Lodge in Grand Teton National Park, north of Jackson Hole, Wyo., Thursday, Aug. 25, 2016. (AP Photo/Brennan Linsley)©AP

Lael Brainard, centre, of the Federal Reserve Board, speaks with activists at the Jackson Hole gathering of central bankers

The Federal Reserve should not rush to lift short-term interest rates given doggedly below-target inflation, risks from overseas and a limited arsenal to counter future economic setbacks, one of its senior policymakers has warned.

Amid fevered speculation about the US central bank’s policy meeting next week, Lael Brainard has set out a series of arguments in favour of caution, reinforcing her existing dovish stance and teeing up an intense debate over policy on September 20-21.

    “In the presence of uncertainty and the absence of accelerating inflationary pressures, it would be unwise for policy to foreclose on the possibility of making further gains in the labour market,” Ms Brainard argued. “To the extent that the effect on inflation of further gradual tightening in labour market conditions is likely to be moderate and gradual, the case to tighten policy preemptively is less compelling.”

    The two-year US Treasury yield plunged from a day high of 0.8 per cent immediately ahead of Ms Brainard’s speech to 0.775 per cent after the transcript was released, while the S&P 500’s gains for the day was extended to 0.9 per cent by the dovish speech.

    With traders already pricing relatively low odds on a September move and markets gyrating in recent days amid policy uncertainty, Ms Brainard’s comments could make it harder for Fed hawks to seal the case for an increase in short-term rates as soon as next week.

    Sharp divisions have already opened up between US central bank policymakers over how quickly to pull the trigger on a second increase in short-term interest rates amid mixed domestic data, contributing to market volatility in recent days.

    On Monday morning Dennis Lockhart, the Atlanta Fed chief, said the strengthening economy meant there should be a “serious discussion” over whether to lift rates on September 21. A number of Fed officials have been advocating a move, among them John Williams of the San Francisco Fed and Eric Rosengren of the Boston Fed.

    In the presence of uncertainty and the absence of accelerating inflationary pressures, it would be unwise for policy to foreclose on the possibility of making further gains in the labour market

    – Lael Brainard, Federal Reserve governor

    Janet Yellen, the Fed chair, said last month in Jackson Hole, Wyoming, that the case for a move had been strengthening. Ms Brainard’s stance is being closely watched by traders in part because she is scheduled to be the final Fed governor to speak before the central bank goes into a silent period ahead of its September 20-21 meeting. It comes amid intense political pressure on the Fed, with Republican candidate Donald Trump on Monday accusing it of doing the Obama administration’s bidding in keeping rates low.

    Ms Brainard said at the Chicago Council on Global Affairs that Fed policymakers needed to take into account a number of new factors in setting rates. Among them was inflation’s persistently below-target level, and the possibility that the relationship between strong hiring and inflation has weakened. “Recent developments suggest some reasons to be concerned more about undershooting than overshooting” on inflation, she said.

    In addition, indicators such as the depressed rate of labour force participation among prime-age people and low wage growth meant the Fed should be “open to the possibility of material further progress in the labour market,” suggesting its officials should not do anything to get in the way.

    Furthermore, disinflation and weak demand from abroad were likely to continue weighing on the US economy, as could fragile global markets and the fallout from the UK’s vote to leave the European Union.

    Investors question central bank action

    Men looks up at an electronic screen displaying stock figures at the Bombay Stock Exchange (BSE) in Mumbai, India, on Tuesday, June 7, 2016. Indian central bank Governor Raghuram Rajan kept the benchmark repurchase rate at a five-year low of 6.5 percent, the Reserve Bank of India said in a statement. Photographer: Prashanth Vishwanathan /Bloomberg

    Even without a recession, we’ve seen the last of the summer calm

    Subdued inflation in Japan and the euro area should be a particular cause for concern, she said. “The experiences of these economies highlight the risk of becoming trapped in a low-growth, low-inflation, low-inflation-expectations environment and suggest that policy should be oriented toward minimising the risk of the US economy slipping into such a situation.”

    The US central bank has only limited scope to counter a future downturn given rates are at rock-bottom levels, Ms Brainard argued, meaning the Fed should exercise “prudence in the removal of policy accommodation.”

    She added: “From a risk-management perspective, therefore, the asymmetry in the conventional policy toolkit would lead me to expect policy to be tilted somewhat in favour of guarding against downside risks relative to preemptively raising rates to guard against upside risks.”

    You must be logged in to post a comment Login