Lael Brainard calls for Federal Reserve to hold its nerve on inflation

A leading Federal Reserve official has warned the US central bank must hold its nerve as it tries to tame soaring inflation, adding her name to the list of policymakers sounding a hawkish note on future rate rises.

Lael Brainard, vice-chair of the Fed, reinforced expectations that the central bank would opt for a third consecutive 0.75 percentage point rate rise at its meeting later this month. “We are in this for as long as it takes to get inflation down,” she said.

Brainard said the Fed had “both the capacity and responsibility” to maintain public confidence in its ability to keep inflation in check in the long run, adding higher rates that restrict the economy would be necessary “for some time”.

The forceful intervention from Brainard, generally seen as a dove on monetary policy, comes as investors increased their bets on the Fed implementing another increase of 75 basis points when officials meet on September 21.

Futures markets on Wednesday implied an 81 per cent chance that they will opt for an increase of that magnitude.

Expectations of further large interest rate rises have propelled the dollar higher in recent months, contributing to downward pressure on other major currencies.

A measure of the dollar against six other peers has jumped almost 15 per cent in 2022. Sterling has slumped by the same magnitude to hover near its weakest level since 1985. The widening gulf between the Fed’s tightening programme and the Bank of Japan’s ultra-loose monetary policy has driven the yen to its lowest level in 24 years.

Brainard, who was speaking at a banking industry conference in New York, said the Fed’s recent rate rises had started to cool some sectors of the US economy. At some point, she said, the central bank would need to consider the risk of overshooting with monetary policy that was too tight.

But she added that before the Fed contemplated easing off in its efforts to tame higher prices it would need to see “several months of low monthly inflation readings” and be confident that it was moving closer to its 2 per cent target.

Brainard’s focus on inflation expectations underscored the Fed’s fear that persistently high inflation will result in a vicious cycle, with companies raising prices and workers demanding higher wages. That could force the central bank to take even more aggressive action and cause further economic pain.

However, she said events in other countries might result in lower inflation in the US, with Europe confronting a weaker economy and a “severe energy shortage” while China extends its coronavirus lockdown measures.

“The disinflationary process here at home should be reinforced by weaker demand and tightening in many other countries,” she said.

Brainard said the US labour market continued to “exhibit considerable strength”, which she said was “hard to reconcile with [a] more downbeat tone of activity”.

Shortly after Brainard’s remarks, the Fed published its most recent Beige Book, an anecdotal assessment of regional economic conditions, which found evidence of a tight labour market across the country.

Brainard is the latest Fed official to reinforce the hawkish message delivered by chair Jay Powell last month in Jackson Hole, Wyoming. Thomas Barkin, president of the Richmond Fed, this week told the Financial Times he had a “bias” towards tightening monetary policy quickly “as long as you don’t inadvertently break something”.

Meanwhile, Michael Barr, the Fed’s vice-chair for supervision, said on Wednesday that the risk of letting inflation spiral higher was “far worse” than being too aggressive.

Barr, who is one of the most senior banking regulators in the US, also said the Fed would “consider adjustments” to various banking rules, including stress tests, capital buffers and its system for assessing bank mergers.

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