Brainard Says Fed to Be Patient as U.S. Recovery Strengthens
(Bloomberg) -- Federal Reserve Governor Lael Brainard said the central bank will take a patient approach to removing monetary stimulus even as the U.S. economic recovery gains momentum.
“It will take some time to achieve substantial further progress,” Brainard said Tuesday in a virtual speech to the National Association for Business Economics. “A patient approach based on outcomes rather than a preemptive approach based on the outlook” will be more effective at achieving the central bank’s goals of sustainable 2% inflation and broad-based and inclusive maximum employment, she said.
The Fed held interest rates near zero last week and signaled they’d stay that way through 2023 to help the economy recover from the Covid-19 pandemic.
“While the outlook has brightened considerably, with jobs nearly 10 million below the pre-Covid level and inflation persistently below 2%, the economy remains far from our goals,” she said.
Nevertheless, expectations for a strong recovery are building. Trillions of dollars in government-financed support and a broadening vaccination effort is helping states reduce restrictions on everything from schools to dining out.
Yields on U.S. government 10-year notes have risen sharply as prospects for higher growth and inflation improved. Brainard was asked about the development during a question and answer session after her speech.
“We will continue to expect markets to be forward looking,” Brainard said. “I would be concerned if I saw disorderly movements. I would be concerned if I saw movements in bond yields that threatened progress on our goals and would certainly take notice if those movements seemed to be inconsistent with our forward guidance.”
Brainard in her speech highlighted the uncertainty around the outlook noting that the “speed of further improvement in the labor market following the initial rush of reopening is less clear.”
“Some employers may be cautious about significantly increasing payrolls before post-COVID consumption patterns are more firmly established,” she added.
Brainard said that even in the face of stronger data the Fed’s new policy regime requires “resolute patience while the gap closes between current conditions and the maximum-employment and average inflation outcomes in the guidance.”
Not all policy makers agree. Seven of 18 Fed officials last week predicted higher rates by the end of 2023 compared with five of 17 at the December gathering, according to their March quarterly projections. Dallas Fed President Robert Kaplan said earlier Tuesday that he is among those estimating the central bank will raise rates next year.
The Fed expects that a bump in inflation this year will be short-lived. Officials saw their preferred measure of price pressures slowing to 2% next year following a spike to 2.4% in 2021, according to the projections. Excluding food and energy, inflation is forecast to hit 2.2% this year and fall to 2% in 2022.
“Entrenched inflation dynamics are likely to take over following the transitory pressures associated with reopening,” Brainard said. “Underlying trend inflation has been running persistently below 2%” for years.
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