Federal Reserve Chair Lael Brainard vowed on Wednesday to step up the fight against inflation, which she said is hurting low-income Americans the most.
That will mean more rate hikes and will keep rates high for longer, she said in a speech she was preparing for a speech in New York. Brainard dampened comments by admitting that policymakers will be data dependent and aware of overdoing the tightening.
“We’re in it for as long as it takes to bring inflation down,” the central bank official said just two weeks before the Fed’s next monetary policy meeting. “So far, we have been briskly raising interest rates to the peak of the previous cycle, and interest rates must continue to rise.”
Stocks rallied after the comments as investors look for signs that the Fed is committed to cutting inflation without going too far.
“At some point in the tightening cycle, the risks become more two-sided,” Brainard added. “The speed of the tightening cycle and its global nature, as well as uncertainty about how quickly the impact of tighter financial conditions will feed through to aggregate demand, creates risks associated with over-tightening.”
Markets are banking on the rate-setting Federal Open Market Committee to vote on its third consecutive 0.75 percentage point hike in interest rates at its September 20-21 reunion.
Lael Brainard, Vice Chair of the Federal Reserve, speaks during a panel discussion at the Urban Institute in Washington, DC, U.S., on Friday, June 3, 2022.
Ting Shen | Bloomberg | Getty Images
Brainard’s comments echo recent comments from several officials who said rates are likely to remain elevated “for some time” even after the Fed stops raising rates. The pledge came from senior central bank policymakers, including Chair Jerome Powell and New York Fed President John Williams.
The federal funds rate is currently targeted in a range of 2.25% to 2.5% after the FOMC made four straight hikes this year.
Although inflation has shown signs of plateauing lately, annual increases are near the highest levels in more than 40 years. Supply shocks, record-breaking fiscal and monetary stimulus, and the war in Ukraine all contributed to this rise.
Without committing to a specific course of action, Brainard said the Fed must remain vigilant.
“With a series of inflationary supply shocks, it is particularly important to guard against the risk that households and businesses could expect inflation to remain above 2% for longer, which would make it much more difficult to bring inflation back down, which is our target.” , she said.
These inflationary pressures are “particularly tough on low-income families,” who spend most of their household budgets on food, energy and shelter, Brainard added.
She noted that there is some anecdotal evidence of falling prices in the retail sector as shopkeepers address a drop in spending due to inflation.
In addition, Brainard said there “may also be scope for a reduction” in auto industry profit margins, which she says are “unusually large” given the gap between wholesale and retail prices.
Conversely, she said the job market remains unusually strong, with rising labor force participation in August being a positive sign.
Brainard said policymakers will be watching the data closely as the economy slows, and hopefully dampen inflation along the way.
“Monetary policy will need to be tight for some time to inspire confidence that inflation is nearing target. The economic environment is highly uncertain and the course of monetary policy will depend on data,” she said.
Powell speaks Thursday as the central bank nears its dormant phase ahead of the September meeting.