Federal Reserve Vice Chair Lael Brainard listens to a question during an interview in Washington, DC, U.S., Monday November 14, 2022.
Andreas Harrer | Bloomberg | Getty Images
Federal Reserve Governor Lael Brainard said Thursday that interest rates must remain high even as there are signs inflation is easing.
Echoing recent comments from her policymakers colleagues, Brainard insisted the Fed would not back down on its commitment to tame prices, which have fallen somewhat in recent months but remain near four-decade highs.
“Even with the recent moderation, inflation remains elevated and policies will need to be sufficiently restrictive for some time to ensure inflation returns to 2% on a sustainable basis,” she said in a remark prepared for a speech in Chicago .
Her comments come less than two weeks before the rate-setting Federal Open Market Committee holds its next Jan. 31-February 2 meeting. 1. Markets rate a nearly 100% probability that the FOMC will raise its benchmark interest rate by another quarter of a point, bringing it to a target range of 4.5% to 4.75%, according to data from CME Group.
However, this would be another, less serious step in the Fed’s move to tighten monetary policy. As Brainard put it, the FOMC “cut” the level of its rate hikes to half a point in December after three consecutive hikes of three-quarters of a percentage point.
“This will allow us to assess more data as we move policy rates closer to sufficiently restrictive levels, while considering the risks associated with our dual mandate targets,” she said.
Brainard pointed to a number of areas where she sees inflation starting to fall.
Noting weaker numbers for retail sales and wages recently, she expressed doubts that the economy is experiencing a 1970s-style wage-price spiral, with higher incomes pushing prices further up and vice versa.
According to the Fed’s preferred measure, personal spending prices excluding food and energy, inflation has been at an annualized pace of 3.1% over the past three months, well below the 12-month pace of 4. 5% That’s still above the Fed’s 2% target, but reflects some progress.
Housing costs remain high, but Brainard and other Fed officials expect them to fall later in the year as apartment rents catch up with falls in commercial real estate. Recent consumer surveys also show that while inflation expectations remain high in the short term, they are more resilient over the longer term.
“Taken together, the price trends in non-housing core goods and services, preliminary signs of some slowdown in wages, evidence of entrenched expectations and scope for margin compression may offer some reassurance that we are not currently seeing 1970s-style wage developments experience. spiraling prices,” said Brainard.
Despite harsh talk from Fed officials about interest rates, markets believe the central bank will miss the 5.1% peak in the fed funds rate it hinted at in December. Instead, traders are seeing the rate down about a quarter of a point and the Fed beginning to cut rates later this year.
Brainard gave no indication that interest rates would fall any time soon.
“Inflation is high and it will take time and determination to bring it back down to 2%. We are determined to stay the course,” she said.