Brainard Signals She’s Open to Raising Interest Rates in March
Federal Reserve Governor Lael Brainard said the U.S. central bank could raise interest rates as early as March to ensure that generation-high price pressures are brought under control.
“The committee has projected several hikes over the course of the year,” Brainard said Thursday in response to a question during her confirmation hearing before the Senate Banking Committee. “We will be in a position to do that, I think, as soon as asset purchases are terminated. And we will simply have to see what the data requires over the course of the year,” she added. The Fed is set to conclude its bond-buying campaign in mid-March.
Her chances of securing a relatively smooth confirmation as Fed vice chair appeared good, judging by the cordial tone of the questions from Republicans during the more-than two-hour hearing. Democratic Senator Tina Smith of Minnesota said she had a very good chance of receiving bipartisan support to be confirmed, while GOP Senator Kevin Cramer of North Dakota said he had “liked” most of Brainard’s answers to questions he put to her recntly in a private meeting.
Brainard’s intent to fight higher prices marks an important shift by one of the central bank’s influential doves, who in July argued that the risk from inflation was that it would revert to its years-long pattern of being too low compared with the Fed’s 2% target.
Price pressures have since climbed to the highest level since 1982 and officials have shifted sharply toward confronting inflation, with a number of them calling for an interest-rate increase as early as their March meeting. They worry price pressures will take root in the U.S. economy.
They forecast strong labor markets even while the economy struggles with the omicron variant of the coronavirus, which could prolong the pandemic’s disruption to the supply of goods, services and workers.
U.S. central bankers signaled last month they will raise the benchmark lending rate at least three times this year and announced an end to their asset-purchase program in mid-March. Their pivot to dialing back pandemic policy support was in response to the strong U.S. labor market, booming growth and consumer prices that rose 7% in 2021.
“We do have a powerful tool and we are going to use it to bring inflation down over time,” Brainard said. “I certainly think that we are hearing from working families around the country about inflation.”
She said price pressures would remain elevated over the next two quarters and noted Fed officials in December forecast inflation would come down closer to 2.5% by the end of the year, “but I think we should all take these projections with a fair amount of caution.”
Brainard was nominated by President Joe Biden to serve as Fed vice chair, succeeding Richard Clarida, who resigned this month before the end of his term in the wake of new questions about his personal trading. If confirmed by the Senate, Brainard will be one of Chair Jerome Powell’s closest team members on monetary policy and strategy along with New York Fed President John Williams.
Powell told lawmakers Tuesday that he expected the Fed to begin shrinking its $8.77 trillion balance sheet later this year. Brainard said that discussion had gotten underway.
Returning the balance sheet and interest rates to more normal levels will be tricky. Fed officials don’t really know how balance-sheet shrinkage will impact the economy or financial markets. The effect of omicron on activity is also a significant question in the forecast.
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