Fed united on inflation front as Brainard rejects early rate cuts

BY Reuters | ECONOMIC | 09/30/22 09:05 AM EDT

By Michael S. Derby

NEW YORK (Reuters) - The Federal Reserve's No. 2 official on Friday added her full endorsement of the U.S. central bank's higher-for-longer game plan for interest rates to curb inflation that new data shows is still running at more than three times policymakers' 2% target.

In her first public remarks since the Fed's decision last week to raise its benchmark interest rate by three-quarters of a percentage point for a third straight time, Fed Vice Chair Lael Brainard said: "Monetary policy is focused on restoring price stability in a high-inflation environment."

"It will take time for the full effect of tighter financial conditions" caused by rate rises to work its way through the economy and lower price pressures, Brainard said in a speech to a New York Fed conference focused on financial stability and monetary policy.

As that process plays out, "monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target. For these reasons, we are committed to avoiding pulling back prematurely."

Brainard said it was far too soon to declare victory over price pressures. "Inflation is very high in the United States and abroad, and the risk of additional inflationary shocks cannot be ruled out."

Fed officials have continued in the past week to beat the drum for an aggressive campaign to lower the highest levels of inflation seen in the United States in 40 years. The central bank's policy rate is now in the 3.00%-3.25% range, a full 3 percentage points higher than where it was at the start of 2022, and policymakers have penciled in more rate rises later this year and in 2023.

Graphics: Powell's policy sprint - https://graphics.reuters.com/USA-FED/INFLATION/gkvlgnaywpb/chart.png

Brainard's remarks indicate she is in stride with her Fed colleagues who have said they must see clear evidence of slowing inflation before they let up on the policy tightening.

San Francisco Fed President Mary Daly said in an interview on Newsy, an online news program, that lowering inflation is the central bank's main mission, adding that "before we get ahead of ourselves and worry about recession, I think we should just get the economy slowing in the way that we need to" bring down inflation.

Speaking separately, Richmond Fed President Thomas Barkin said he was more worried about inflation becoming sticky than in the prospect that the central bank had pushed too hard with its rate hikes.

"At this point the risk of inflation festering feels like a bigger risk than inflation coming down on its own and us having oversteered," Barkin said in comments to reporters after remarks to business officials in Virginia.

INFLATION STILL ELEVATED

The Fed officials' remarks coincided with the release of the latest reading of the Fed's preferred measure of inflation, which showed price pressures remain a problem.

The personal consumption expenditures price index rose 6.2% in August from the same month a year ago, a small moderation from the 6.4% year-over-year increase seen in July. But when stripped of food and energy costs, the index increased 4.9% from August 2021, versus the 4.7% year-over-year rise seen in the month before.

A separate inflation measure released by the Dallas Fed on Friday that excludes items with the largest price swings also rose in August, a sign that price pressures remained broad throughout the economy.

The inflation data matched other recent reports that showed a broadening of underlying inflation in the U.S. economy, which should keep the Fed on track for aggressive rate rises in the coming months.

Graphics: Rates up, inflation sideways Rates up, inflation sideways - https://graphics.reuters.com/USA-FED/FOMC/lbpgnkeyrvq/chart.png

That said, there was some positive news in the outlook for price pressures. The University of Michigan's consumer sentiment survey for September found that the public's projected five-year-ahead inflation outlook cooled.

"Inflation expectations are likely to remain relatively unstable in the months ahead, as consumer uncertainty over these expectations remained high and is unlikely to wane in the face of continued global pressures on inflation," the Michigan survey said.

Fed officials believe where inflation now stands is strongly influenced by its expected path. Officials have said the relative stability of long-term inflation expectations shows public confidence that the central bank will eventually get inflation back to its 2% target.

In her remarks on Friday, Brainard noted the destination point of Fed rate hikes is not clear at this time.

"Uncertainty is currently high, and there are a range of estimates around the appropriate destination of the target range for the cycle," she said. The Fed will have to feel its way forward and see how its rate rises work through the economy, and will act "deliberately and in a data-dependent manner" with future policy actions.

Brainard also took stock of the potential for "cross-border spillovers and spillbacks" as the Fed and other major central banks ratchet up interest rates to combat inflation.

Financial markets across the world have been facing high levels of volatility, particularly this week, and the dollar's value against key currencies has surged, fueling concern that the Fed's domestic mission could cause major problems elsewhere.

Brainard said the Fed is closely watching how its policy actions affect the global economy and financial system, adding that Fed officials and policymakers in other nations are in contact.

"We are attentive to financial vulnerabilities that could be exacerbated by the advent of additional adverse shocks," said Brainard, a former top U.S. Treasury official in charge of international issues.

She also laid out areas where parts of the world could run into trouble, but did not say that any particular problems appeared imminent or of a magnitude that would change the Fed's current monetary policy path.

(Additional reporting by Ann Saphir, Lindsay Dunsmuir and Howard Schneider; Editing by Paul Simao)

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