Fed’s Brainard: Number One challenge is getting inflation down

Lael Brainard, Vice Chairwoman of the Fed said on Thursday that the Fed is monitoring mixed signals on the US economy, but the number one priority will still be getting inflation down. Brainard has added that she does expect to see some cooling of the economy over time, and that she does expect to see some moderation and a better balance in the labour market.

As for moderating inflation and the US economy, Brainard has warned that it is still too early to conclude that the central bank can ascertain that inflation is under control. Quantitative Tightening might be worth another 2-3 rate hikes, she stated and the Fed takes this into account when assessing financial conditions.

Brainard noted that she wants to see a consistent string of data showing this is the case. There is a fair amount of uncertainty, she continued, though she added that it is clear that the Fed needs to get inflation down.

There is a path to do this with a growing economy and moderating labour market, she continued, adding also that there is a path to see demand cooling, inflation coming down and the labour market still strong. Economists refer to this as a “soft landing”.

The economy has a lot of momentum, Brainard added, noting that the Fed is going to do what is necessary to bring inflation back down. Businesses, households and balance sheets are starting this process from a very healthy position, she continued.

Financial conditions have tightened quite a lot and are a lot tighter than pre-pandemic levels, Brainard observed. While the Fed cannot affect supply shocks, Brainard said the central bank has confidence that it has the tools to start cooling demand, adding that monetary policy transmission is already working.

Conversely, if demand does moderate and inflation decelerates then the pace of hikes could slow to that prices by markets (25 bps per meeting). It is important to keep in mind that while the Fed is raising interest rates, it is also shrinking its balance sheet, Brainard added, and this is also tightening financial conditions.

Brainard indicated that market expectations for 50 bps rate hikes at the next two meetings seem like a reasonable path, before adding that, regarding September’s meeting, it is harder to say, as she does not have a clear sense of where the economy will be in September. If inflation hasn’t sufficiently decelerated, it may be appropriate for another 50-bps rate hike, she said.