(Bloomberg) -- Federal Reserve Vice Chair Lael Brainard said the US central bank will have to raise interest rates to restrictive levels and keep them there for “some time,” while cautioning risks would become more two-sided in the future.
“We are in this for as long as it takes to get inflation down,” Brainard said Wednesday at a conference hosted by The Clearing House and Bank Policy Institute in New York. “Monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target.”
U.S. central bankers are raising interest rates rapidly to counter red-hot inflation after being slow to respond as prices began to surge in late 2021. They hiked by 75 basis points at their meetings in June and July and have left the same again on the table when they gather later this month, or a smaller half-point move, depending on the data.
Brainard gave no indication in the text of her remarks about her preference for the size of the hike at the policy meeting later this month, though she noted that at some point risks will increase with further tightening.
‘Two-Sided’
“At some point in the tightening cycle, the risks will become more two-sided,” she said. “The rapidity of the tightening cycle and its global nature, as well as the uncertainty around the pace at which the effects of tighter financial conditions are working their way through aggregate demand, create risks associated with over-tightening.”
At the same time, “it is important to avoid the risk of pulling back too soon,” she said.
The U.S. economy has fared well on the back of steady consumer spending even as higher rates bite down on housing and investment. The labor market remains strong with unemployment at 3.7%.
The Fed vice chair struck an optimistic note on some supply constraints, noting improvements in delivery times for some goods and a rise in labor force participation in August. She said that while there are reports of businesses discounting to move excess inventories, there is no “hard data at an aggregate level suggesting that businesses are reducing margins in response to more price sensitivity among customers.”
Inflation was 6.3% for the 12 months ending July, according to the Commerce Department gauge targeted by the Fed, which aims for 2% inflation. While measures are showing some moderation, Brainard said it “will be necessary to see several months of low monthly inflation readings to be confident that inflation is moving back down to 2%.”
A separate Labor Department measure of consumer prices will be released on Sept. 13. Economists surveyed by Bloomberg expect it to moderate to 8.1% in the year through August, from 8.5% the month before.
Brainard said the disinflation in the U.S. “should be reinforced by weaker demand and tightening in many other countries.”
Europe, China
“This is particularly the case as Europe contends with downside risks to activity and a severe energy shortage caused by Russia’s war against Ukraine, and as China maintains its zero-COVID approach against a backdrop of weaker consumption,” she said.
The dollar has risen by more than 10% against other major currencies this year, reflecting a US outlook that looks more promising that many other major economies. A stronger dollar helps to dampen US inflation by making imports cheaper, but weaker global economic growth could also become a headwind for the US.
Despite Europe’s woes, and more Covid-19 lockdowns in China, Fed officials have been single-minded in their inflation fight.
Speaking Aug. 26 at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming, Powell said another “unusually large increase” in the benchmark lending rate could be appropriate this month, depending on the “totality” of incoming data.
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