Home Markets Fed Governor Lael Brainard sees high rates and progress in inflation ahead

Fed Governor Lael Brainard sees high rates and progress in inflation ahead

by SuperiorInvest

Lael Brainard, vice chairman of the U.S. Federal Reserve, during a University of Chicago Booth School of Business event in Chicago, Illinois, U.S., Thursday, Jan. 19, 2023.

Jim Vondruska | Bloomberg | Getty Images

Governor of the Federal Reserve System Lael Brainard he said on Thursday that interest rates must remain high even as there are signs that inflation is starting to ease.

Echoing recent comments from her fellow policymakers, Brainard insisted that the Fed would not abandon its commitment to tame prices that some have fallen in recent months but remain near four-decade highs.

“Despite the recent easing, inflation remains high and policy will need to be sufficiently restrictive for some time to ensure that inflation returns to 2% on a sustained basis,” she said in remarks prepared for a speech in Chicago.

Her comments come less than two weeks before the next meeting of the Federal Open Market Committee, which sets rates, on Jan. 31-Feb. 1. Markets are assigned almost 100% probability that the FOMC will raise its benchmark interest rate by another quarter of a percentage point to a target range of 4.5-4.75%, according to CME Group data.

But that would represent another minor step in the Fed’s move to tighten monetary policy. As Brainard said, the FOMC “shifted gears” in December his rate level increases to half a point, after three consecutive increases of three quarters of a percentage point.

“This will allow us to evaluate more data as the policy rate moves closer to a sufficiently restrictive level, taking into account the risks associated with our dual mandate goals,” she said.

Brainard pointed to a number of areas where she believes inflation is beginning to decline.

Recently, it has seen weaker numbers retail sales and wagesand expressed doubt that the economy is experiencing a 1970s-style spiral in wages and prices, where higher earnings keep pushing prices higher and vice versa.

According to the Fed’s preferred measure, the price of personal consumption expenditures excluding food and energy, inflation ran at an annualized rate of 3.1% in the past three months, well below 4.5% over 12 months. That’s still ahead of the Fed’s 2% target, but it reflects some progress.

Housing costs remain high, but Brainard and other Fed officials expect them to ease later in the year as apartment rents catch up with the decline in commercial real estate. Recent consumer surveys also show that while inflationary expectations remain elevated in the near term, they are more stable further away.

“Price trends in core goods and non-housing services, early signs of some wage slowdown, evidence of anchored expectations and room for margin compression may provide some assurance that we are not currently experiencing 1970s-style wages. price spiral,” Brainard said.

Despite tough talk from Fed officials on rates, markets believe the central bank will fall short of the 5.1% peak in the federal funds rate it pointed to in December. Instead, traders see the rate crossing about a quarter of a percentage point lower and the Fed starting to cut rates later this year.

Brainard did not indicate that rates are expected to drop anytime soon.

“Inflation is high and it will take time and determination to get it back to 2%. We are determined to stay the course,” she said.

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