Federal Reserve Vice Chair Lael Brainard said Wednesday that while a small drop in inflation is welcome, the Fed will still need to raise interest rates further and for as long as it takes to bring down inflation.
“While the moderation in monthly inflation is welcome, it will be necessary to see several months of low monthly inflation readings to be confident that inflation is moving back down to 2 percent,” Brainard said in a speech in New York.
“Monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target,” she said, adding: “We are in this for as long as it takes to get inflation down.”
“How long it takes to move inflation back down to 2 percent will depend on a combination of continued easing in supply constraints, slower demand growth, and lower markups, against the backdrop of anchored expectations,” Brainard said.
The Fed vice chair noted the rate at which the Fed will shrink its bond holdings will double this month, and that this action together with rate hikes should help tamp down inflation. Though Brainard noted it may take some time for the full effect of tighter financial conditions to work their way through the economy given monetary policy tends to operate with a lag.
Brainard also warned of the risks of pulling back on rate hikes too soon.
“Following a lengthy sequence of adverse supply shocks to goods, labor, and commodities that, in combination with strong demand, drove inflation to multi-decade highs, we must maintain a risk management posture to defend the inflation expectations anchor,” she said.
Brainard’s comments come ahead of the Fed’s September policy meeting at which the central bank is expected to raise its benchmark interest rate by three-quarters of a percent for the third-straight meeting.
The federal funds rate currently stands at 2.25%-2.50%. A 75 basis point rate hike would bring the interest rate back above 3% for the first time since 2008.
On Wednesday morning, market pricing showed traders pricing in a greater likelihood of a 0.75% rate hike this month following a report from Nick Timiraos in the Wall Street Journal, which cited, in part, Fed Chair Jay Powell’s “public pledge to reduce inflation.” According to data from the CME Group, there is now an 80% chance the Fed raises rates by 75 basis points in its September 21 policy announcement.
Inflation measured by the consumer price index fell to 8.5% in July from to 9.1% in June. Brainard said Wednesday the economic environment remains is “highly uncertain” and rate hikes will depend on economic data.
Anecdotally, in signs Brainard sees inflation has further to drop, she says retail profit margins have further room to shrink and noted reports of large retailers planning markdowns due to excess inventories.
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