Fed’s Brainard Says Economy Far From Goals With Two-Sided Risks

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Federal Reserve Governor Lael Brainard said there are risks on both sides of monetary policy right now as the U.S. economy surges ahead in a post-pandemic boom while millions of people remain unemployed.

“I am attentive to the risks on both sides,” she said Tuesday in the text of her remarks to the Economic Club of New York. “I will carefully monitor inflation and indicators of inflation expectations for any signs that longer-term inflation expectations are evolving in unwelcome ways.”

Inflation readings are coming in higher than Fed officials expected and are stirring discussions among policy makers about when they should scale back their $120 billion in monthly asset purchases. Fed Vice Chairs Randal Quarles and Richard Clarida both said last week that policy makers could begin this discussion at “upcoming meetings.” A key gauge of prices targeted by the Fed rose 3.6% in April from a year earlier, the biggest jump since 2008.

“While the level of inflation in my near-term outlook has moved somewhat higher, my expectation for the contour of inflation moving back towards its underlying trend in the period beyond the reopening remains broadly unchanged,” Brainard said.

The post-pandemic growth surge has pushed up prices on many goods with demand outpacing supply and there is high uncertainty on how long this mismatch will persist. Brainard said she expected the trend of low and stable inflation to re-emerge at some point.

Temporary Factors

“Relative to the entrenched inflation dynamics that existed before the pandemic, the sharp temporary increases in some categories of goods and services seem unlikely to leave an imprint on longer-run inflation behavior,” she said.

One unusual feature of the inflation readings is that they are occurring at a time when millions of people remain unemployed. The Labor Department will publish the May U.S. employment report on Friday and economists forecast a 5.9% unemployment rate, down from 6.1% the prior month. Brainard said she expected to see further labor market progress in coming months.

“Today employment remains far from our goal,” she added. “Jobs are down by over 8 million relative to their pre-pandemic level, and the shortfall is over 10 million jobs if we take into account the secular job growth that would have occurred over the past year.”

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