A senior Federal Reserve official has warned that the US central bank must keep its cool as it tries to rein in soaring inflation, adding his name to a list of policymakers sounding a hawkish note on futures rate hikes.
Fed Vice Chairman Lael Brainard reinforced expectations that the central bank would opt for a third straight hike of 0.75 percentage points at its meeting later this month. “We’re here for as long as it takes to bring inflation down,” she said.
Brainard said the Fed had “both the ability and the responsibility” to maintain public confidence in its ability to control inflation over the long term, adding higher rates that restrain the economy would be needed “for a while.” time”.
Brainard’s forceful intervention, widely seen as a dove on monetary policy, comes as investors upped their bets on the Fed by implementing another 75 basis point hike at the officials’ meeting on September 21. .
On Wednesday, futures markets implied an 81% chance that they would opt for a rise of this magnitude.
Expectations of further significant interest rate hikes have propelled the dollar higher in recent months, contributing to downward pressure on other major currencies.
A measure of the dollar against six other peers has jumped almost 15% in 2022. The pound has fallen by the same magnitude to near its weakest level since 1985. The widening gap between the program Tighter Fed and Bank of Japan monetary policy drove the yen to its lowest level in 24 years.
Brainard, speaking at a banking industry conference in New York, said the Fed’s recent rate hikes had started to chill some sectors of the U.S. economy. At some point, she said, the central bank should consider the risk of overshooting with an overly tight monetary policy.
But she added that before the Fed considers relaxing its efforts to rein in rising prices, it should see “several months of low monthly inflation rates” and be confident that it is getting closer to its target of inflation. 2%.
Brainard’s focus on inflation expectations underscored the Fed’s concern that persistently high inflation could lead to a vicious cycle, with companies raising prices and workers demanding higher wages. This could force the central bank to take even more aggressive action and cause further economic hardship.
However, she said events in other countries could lead to lower inflation in the United States, with Europe facing a weaker economy and a “serious energy shortage” while China extends its Covid lockdown measures.
“The disinflationary process here at home should be bolstered by weaker demand and tightening in many other countries,” she said.
Brainard said the U.S. labor market continued to “show considerable strength” which she said was “difficult to reconcile with [a] more pessimistic tone of activity”.
Shortly after Brainard’s remarks, the Fed released its most recent Beige Book, an anecdotal assessment of regional economic conditions, which found evidence of a tight labor market across the country.
Brainard is the latest Fed official to reinforce the hawkish message delivered by Chairman Jay Powell last month in Jackson Hole, Wyoming. Thomas Barkin, chairman of the Richmond Fed, told the Financial Times this week that he had a “bias” to tighten monetary policy quickly “as long as you don’t inadvertently break something.”
Meanwhile, Michael Barr, the Fed’s vice chairman for supervision, said on Wednesday that the risk of letting inflation soar was “much worse” than being too aggressive.
Barr, who is one of the most important banking regulators in the United States, also said the Fed would “consider adjustments” to various banking rules, including stress tests, capital buffers and its regulatory system. assessment of bank mergers.
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