Fed Vice Chair Brainard warns against retreating from inflation fight prematurely

U.S. Federal Reserve board member Lael Brainard speaks after being nominated by U.S. President Joe Biden as Vice Chairman of the Federal Reserve, in the South Court Auditorium of the Eisenhower Executive Office Building at the White House in Washington, United States, November 22, 2021.

Kevin Lamarque | Reuters

Federal Reserve Vice Chairman Lael Brainard on Friday stressed the need to fight inflation and the importance of not backing down from the task until it is complete.

“Monetary policy will have to be tight for a while to have confidence that inflation is returning to target,” the central bank official said in remarks prepared for a speech in New York. “For these reasons, we undertake to avoid withdrawing prematurely.”

The remarks came just over a week after the Fed enacted its fifth interest rate hike of the year, pushing its benchmark key rate to a range of 3% to 3.25%. The September increase marked the third consecutive increase of 0.75 percentage points for a rate that affects most adjustable-rate consumer debt.

While Fed officials and many economists expect inflation to have peaked, Brainard cautioned against complacency.

“Inflation is very high in the United States and abroad, and the risk of additional inflationary shocks cannot be ruled out,” she said.

Earlier Friday morning, the Commerce Department released data showing that inflation continued to climb in August, as measured by the Fed’s preferred personal consumption expenditures price index. Core PCE rose 4.9% year over year and 0.6% for the month, both above estimates and well above the 2% inflation target from the Fed.

Since the Fed raised rates, Treasury yields have soared and the dollar has rapidly risen in value against its global peers. Brainard noted the ramifications of a higher U.S. currency, saying it exerts inflationary pressures globally.

“Overall, the appreciation of the dollar tends to reduce import prices in the United States,” she said. “But in some other jurisdictions, the corresponding currency depreciation may contribute to inflationary pressures and require further tightening to compensate.”

The Fed is far from alone in tightening policy, as central banks around the world have raised rates to tackle their own inflation woes. However, the Fed has been more aggressive than most of its peers, which Brainard said could have some fallout.

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