Fed's Brainard Sees Rate Rises as Appropriate as Inflation Firms -- Update

03/06/18 09:20 PM EST
By David Harrison 

Federal Reserve governor Lael Brainard said Tuesday she has become more confident inflation will hit the central bank's target, allowing officials to continue raising interest rates gradually.

She also sounded more upbeat about the economic outlook, saying factors that held back the U.S. economy in recent years have reversed and now are offering a boost, in a speech in New York.

Today's economy "is the mirror image of the environment we confronted a couple of years ago," Ms. Brainard said. "In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy. Today, with headwinds shifting to tailwinds, the reverse could be true."

Ms. Brainard's mention of headwinds turning into tailwinds echoed language in Fed Chairman Jerome Powell's testimony to Congress last week, in which he expressed optimism about the economy's path.

Fed officials in December penciled in three quarter-percentage-point increases in their benchmark interest rate this year. The first move is likely coming at the March 20-21 meeting.

But the strong economy and Mr. Powell's congressional testimony have raised expectations that officials could add a fourth rate increase. The Fed last raised its benchmark federal-funds rate in December to a range between 1.25% and 1.5%.

Asked in a question-and-answer session after the speech about the potential for four rate increases this year, Ms. Brainard said that "we could see risks develop in either direction," which could result in changes to the path of rate raises.

Ms. Brainard in recent years was one of the Fed's most vocal advocates for patience in raising interest rates, noting that inflation remained subdued despite a strong labor market. Inflation has undershot the Fed's 2% target for much of the past five years.

On Tuesday, Ms. Brainard struck a more upbeat tone and suggested a booming labor market could generate stronger inflation.

"With greater confidence in achieving the inflation target, continued gradual increases in the federal-funds rate are likely to be appropriate, " she said.

"Although last year we faced a disconnect between the continued strengthening in the labor market and the step-down in inflation, mounting tailwinds at a time of full employment and above-trend growth tip the balance of considerations in my view."

In particular, Ms. Brainard said recently enacted fiscal policy such as tax cuts and spending increases could boost economic growth. She also cited a stronger global outlook, a weaker dollar, higher oil prices, higher capital spending and financial conditions that continue to support growth.

Those factors could help pin inflation expectations around the Fed's 2% target, she said. Inflation could even exceed 2% temporarily in the next year or two, she added.

Ms. Brainard also said the Fed will need to make sure the improved outlook doesn't lead to the formation of new asset bubbles. For now, she said, the financial system faces only "moderate" risks because households aren't borrowing excessively and banks have enough capital on hand.

"History suggests, however, that a booming economy can lead to a relaxation in lending standards, and the attendant excessive borrowing can complicate the task of monetary policy," she said. "We will need to be vigilant."

Write to David Harrison at david.harrison@wsj.com


(END) Dow Jones Newswires

March 06, 2018 21:20 ET (02:20 GMT)

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