By Jonathan Spicer
NEW YORK (Reuters) - Things are looking up for a U.S. economy that struggled in recent years to boost growth and inflation, so the Federal Reserve should expect to gradually raise interest rates, an influential Fed governor said on Tuesday.
In her first public comments on policy since October, a relatively upbeat Fed Governor Lael Brainard said economic "headwinds are shifting to tailwinds" given the "substantial" boost from tax cuts and government spending, and synchronized global growth. Taken together, she said she has more confidence that inflation will finally rise to a target.
The speech, while hedged with risks that prices may yet remain too soft, suggest that one of the U.S. central bank's most influential doves will not for now resist another year of policy tightening, and that she is largely aligned with new Fed Chairman Jerome Powell.
"Mounting tailwinds at a time of full employment and above-trend growth tip the balance of considerations," Brainard, the only economist currently on the Fed Board, told a bond-traders dinner in New York. "With greater confidence in achieving the inflation target, continued gradual increases in the federal funds rate are likely to be appropriate."
In a nod to falling unemployment, which is now 4.1 percent, the Fed raised rates three times last year even as inflation edged lower. Forecasts suggest it will hike three more times this year, as inflation shows signs of perking up and as Congress since December adopted $1.5-trillion in tax cuts and a $300-billion rise in spending.
Brainard, a permanent voter on policy, said the Fed must get inflation up to target while sustaining full employment. She said she would welcome a "mild, temporary" overshoot of the 2-percent inflation target but noted it remained unclear how much hotter the labor market could yet get.
"We do not have extensive experience" with an economy in which unemployment falls much further and the Fed "will need to remain attentive to risks of financial imbalances," she said.
Aside from the fiscal stimulus and global growth, Brainard said the economy is also benefiting from stronger foreign demand, oil prices and a softer dollar relative to the 2015-2016 period in which she raised several red flags and argued for caution in tightening monetary policy. Last year, she backed the rate hikes but remained cautious about weak inflation readings.
Overall risks of imbalances are "moderate," Brainard said noting stock prices remain elevated and corporate bond spreads are "quite compressed" despite volatile market sell-offs and recoveries since last month.