Brainard Urges Patience at Fed as Fischer Sees Inflation Signs

Barclays' Michael Gapen on Fed Rate Hikes
  • Brainard cites downside risks and calls for prudent hikes
  • Fischer says low unemployment may finally stir inflation

Federal Reserve Governor Lael Brainard said the U.S. economy isn’t immune to global risks and called for careful adjustments to the policy rate to preserve the expansion.

The speech, to the Institute of International Bankers annual conference in Washington, was one of the most detailed arguments to date by a Fed official on downside risks to the outlook despite several economic reports showing continued underlying strength in hiring and consumption.

Brainard said there are reasons to expect continued gains in employment, stabilizing growth in foreign economies, and an eventual rise of inflation back to the Fed’s 2 percent target. “However, there are risks around this baseline forecast, the most prominent of which lie to the downside,” she said. 

“Given weak and decelerating foreign demand, it is critical to carefully protect and preserve the progress we have made here at home through prudent adjustments to the policy path,” she said.

Speaking at a separate event in Washington, Fed Vice Chairman Stanley Fischer contested the idea that the connection between low unemployment and inflation was broken, and said it may be reasserting itself now. The nation’s unemployment rate was 4.9 percent in February.

“The link has never been very strong, but it exists, and we may well at present be seeing the first stirrings of an increase in the inflation rate -- something that we would like to happen,” he told the National Association for Business Economics in prepared remarks mostly focused on the history of economic thought.

FOMC Decision

The speeches capture some of the tension that is likely to rise among policy makers if they forgo a rate increase next week.

U.S. central bankers next meet March 15-16, and money-market investors see almost no chance of a rate increase at that meeting. Officials will publish a new set of forecasts, including new estimates on the path for their policy rate.

Recent economic reports suggest the economy has shaken off the effects of the financial volatility earlier this year. Payrolls grew by 242,000 workers in February and the unemployment rate matched an eight-year low. Steady growth is pulling more people into the labor force, a trend Fed Chair Janet Yellen has been looking for.

Disinflation fears resulting from a strong dollar have diminished as growth has established a more sure footing. The personal consumption expenditures price index excluding food and fuel rose 1.7 percent in the 12 months through January compared with 1.5 percent in December, the first break above 1.5 percent since October 2014. The Fed’s preferred inflation index, which includes all goods and services, climbed 1.3 percent in the year ended January.

Steady hiring, cheap gasoline, and rising home values are powering Americans’ ability to boost spending, which accounts for almost 70 percent of the economy.

“We should not take the strength in the U.S. labor market and consumption for granted,” Brainard warned, noting the challenging transition in China’s economy and that “sources of robust demand around the globe are few, and sources of weakness relatively greater.”

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