Fed Vice Chair Brainard warns against retreating from inflation fight prematurely

U.S. Federal Reserve Board member Lael Brainard speaks after being nominated by U.S. President Joe Biden to serve as Vice Chair of the Federal Reserve, in the South Court Auditorium of the Eisenhower’s Executive Office at the White House in Washington, US on November 22, 2021.

Kevin Lamarque | Reuters

Federal Reserve Vice Chairman Lael Brainard on Friday stressed the need to address inflation and the importance of not shrinking from the task until it’s done.

“Monetary policy will need to be tight for a while to have confidence that inflation is returning to target,” the central bank official said in remarks prepared for a speech in New York. “For these reasons, we are committed to avoiding premature backtracking.”

The remarks came just over a week after the Fed enacted its fifth rate hike of the year, pushing its benchmark funds rate into a range of 3% to 3 .25% The September increase was the third consecutive 0.75 percentage point increase for a rate that feeds most adjustable-rate consumer debt.

While Fed officials and many economists expect inflation to have peaked, Brainard cautioned against complacency.

“Inflation is very high in the United States and abroad, and the risk of additional inflationary shocks cannot be ruled out,” he said.

Early Friday morning, the Commerce Department released data showing that inflation continued to rise in August, as measured by the Fed’s preferred personal consumption expenditures price index. Core PCE rose 4.9% year-on-year and 0.6% on the month, both above estimates and well above the Fed’s 2% inflation target.

Since the Fed raised rates, Treasury yields have soared and the value of the dollar has risen rapidly against its global peers. Brainard pointed to the ramifications of a higher US currency, saying it is exerting inflationary pressures globally.

“In general, the appreciation of the dollar tends to lower import prices into the United States,” he said. “But in some other jurisdictions, the corresponding currency depreciation may contribute to inflationary pressures and require additional tightening to compensate.”

The Fed is far from alone in tightening policy, as central banks around the world have raised rates to combat their own inflation problems. However, the Fed has been more aggressive than most of its peers, which Brainard noted could have spillover effects.

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