Brainard Sees Gradual Fed Hikes Still Appropriate in ‘Near Term’

(Bloomberg) -- Federal Reserve Governor Lael Brainard said U.S. economic momentum is strong and a gradual approach to interest-rate increases remains appropriate for now.

“The gradual path of increases in the federal funds rate has served us well by giving us time to assess the effects of policy as we have proceeded,’’ Brainard said Friday at a conference at the Peterson Institute for International Economics in Washington. “That approach remains appropriate in the near term, although the policy path increasingly will depend on how the outlook evolves.”

The Fed governor’s comments, ahead of the U.S. central bank’s Dec. 18-19 policy meeting, suggest she is on board with an increase this month, which would be the ninth hike in three years. However, similar to Chairman Jerome Powell, she also sees reasons to proceed more cautiously in 2019.

The use of the phrase “near term” is a shift for Brainard who, in a Sept. 12 speech in Detroit, said continued gradual increases in the fed funds rate were likely to be appropriate “over the next year or two.”

Brainard Sees Gradual Fed Hikes Still Appropriate in ‘Near Term’

Brainard pointed to the labor market, including the November employment report released earlier Friday, as a sign of the economy’s underlying strength, nothing that average payroll gains of 170,000 over the past three months are “well above’’ the pace necessary to absorb new entrants. She said indicators of underlying trend inflation “remain encouraging.’’

“The most likely path for the economy is positive, although some tailwinds that have provided a boost are fading, and we may face some crosscurrents,’’ Brainard said in the text of her remarks, which also focused on financial vulnerabilities in the economy and encouraged a consideration of raising the counter cyclical capital buffer for banks. “The global growth that provided a strong tailwind going into this year has moderated.”

Growth Headwinds

Among risks to the outlook, Brainard cited the U.K.’s deliberations over Brexit and Italy’s debt trajectory. In the U.S., businesses are reporting uncertainty about trade policy and the implications that may have for supply chains. That could weigh on capital spending, she said. At the same time, difficulties finding qualified workers and increasing input costs associated with tariffs could pass through to prices.

“However, inflation remains muted overall,” Brainard said.

U.S. central bankers lead by Powell have signaled that after this month their approach to rate increases will be more reliant on economic data as they close in on the bottom of their estimated range of the neutral interest rate -- one that neither speeds up nor slows the economy. Minutes from the November policy meeting showed officials want to revise their guidance of “further gradual increases” to phrasing that signals more reliance on near-term data.

“There is a great degree of data-dependence in how, certainly, I am assessing the path forward,” Brainard said in a question and answer session after the speech, adding that with inflation near target and the labor market “in the vicinity” of full employment, the Fed’s job now is “to sustain the expansion.”

“We’ll have to continue to assess what path of policy is appropriate as the data comes in and affect our views about the outlook,” she said in response to a question.

Stocks are down for a third trading day this week on fears of worsening U.S.-China trade relations and weakening global growth at a time when the Fed is raising interest rates. Brainard noted that financial conditions have tightened in recent months, though she said they are still supportive of growth.

Brainard also stepped up her argument for turning on the Fed’s so-called countercyclical capital buffer to require an additional amount of capital in the banking system that would be flooded back when the industry is under stress.

“At a time when cyclical pressures have been building and bank profitability has been strong, it might be prudent to ask large banking organizations to fortify their capital buffers, which could subsequently be released if conditions warrant,” she said.

The buffer can only be imposed by the Fed Board, and both Powell and Vice Chairman for Supervision Randal Quarles have suggested risks haven’t risen sufficiently to trigger the need. The Fed is scheduled to conduct its annual review of the buffer in January.

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