Fed’s Brainard Says Bond Buying Needed for ‘Quite Some Time’

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Federal Reserve Governor Lael Brainard pushed back against suggestions the central bank could taper its bond-buying program later this year, arguing the U.S. economy will need that monetary support for “quite some time.”

“The economy is far away from our goals in terms of both employment and inflation, and even under an optimistic outlook, it will take time to achieve substantial further progress,” Brainard said Wednesday in a virtual speech to the Canadian Association for Business Economics. “Given my baseline outlook, I expect that the current pace of purchases will remain appropriate for quite some time.”

The Fed last month signaled interest rates would stay near zero at least through 2023 to help the U.S. economy recover from the Covid-19 pandemic, and pledged to keep buying bonds at a $120 billion monthly pace until “substantial further progress” had been made on its employment and inflation goals. “We have indicated in our communications that of course we stand ready to increase those amounts should we judge that to be warranted,” she said in response to a question following her prepared remarks.

Even so, four of the Fed’s 18 policy makers have raised the prospect that they may discuss reducing bond buying -- comments which rattled investors and helped push up yields on longer-term Treasuries and steepened the spread between rates on two- and 10-year debt to around the widest in more than three years.

“The pandemic asset purchases will continue at least at the current pace until substantial further progress is made on our employment and inflation goals,” Brainard said. “In assessing substantial further progress, I will be looking for sustained improvements in realized and expected inflation and will examine a range of indicators to assess shortfalls from maximum employment.”

Inflation Low

She noted that inflation measures are still running more than half a percentage point below the Fed’s 2% target while payroll employment is nearly 10 million jobs below its pre-pandemic levels.

Brainard said the test for stable prices is “sustained improvement” rather than temporary achievements of a 2% annual price gain. She also cautioned that removing accommodation before employment gains showed greater breadth and strength could “lead to an unwarranted loss of opportunity for many workers.”

She said it is clear to her at least that Fed remains “far” from its goals now, “and it is too early to say how long it will take” to achieve them. Nevertheless, U.S. central bankers last month forecast a strong rebound in the economy with improving labor markets as the distribution of vaccines brings the pandemic under control.

Their December forecasts show, however, they won’t reach their inflation target of 2% until the end of 2023. One measure, the consumer price index, rose just 1.4% last year.

Lessons from the last recovery show that it took years of economic growth to boost worker compensation. Without real wage growth, consumers typically buy less goods and services when prices go up or substitute for cheaper items, making it harder for firms to charge more for their goods or services.

The latest spike in coronavirus cases has caused a wave of new restrictions in various states that are slowing economic activity. Non-farm payrolls fell last month by 140,000 jobs. The national unemployment rate held at 6.7% while nearly 1 in 10 Black Americans remain jobless and the rate for Hispanic workers rose to 9.3%. Sentiment at small businesses, which employ millions of Americans, slumped to a seven-month low in December.

Brainard is the only sitting governor who was nominated by a Democratic administration. She was considered a possible candidate to become President-elect Joe Biden’s Treasury secretary, a job that ultimately went to former Fed Chair Janet Yellen.

©2021 Bloomberg L.P.

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