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Fed Governor Lael Brainard sees high rates ahead even with progress on inflation

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Lael Brainard, vice chair of the US Federal Reserve, during a University of Chicago Booth School of Business event in Chicago, Illinois, US, on Thursday, Jan. 19, 2023. 

Jim Vondruska | Bloomberg | Getty Images

Federal Reserve Governor Lael Brainard said Thursday that rates of interest must remain high, though there are signs inflation is beginning to ease.

Echoing recent comments from her fellow policymakers, Brainard insisted that the Fed won’t waiver in its commitment to taming prices which have come down some in recent months but remain near four-decade highs.

“Even with the recent moderation, inflation stays high, and policy will should be sufficiently restrictive for a while to make sure that inflation returns to 2% on a sustained basis,” she said in remarks prepared for a speech in Chicago.

Her comments come lower than two weeks before the rate-setting Federal Open Market Committee holds its next meeting, on Jan. 31-Feb. 1. Markets are assigning a near-100% probability that the FOMC will a raise its benchmark rate of interest one other quarter percentage point, taking it to a goal range of 4.5%-4.75%, based on CME Group data.

That, nonetheless, would represent one other less-severe step within the Fed’s move to tighten monetary policy. As Brainard put it, the FOMC in December “downshifted” the extent of its rate increases to half some extent, after three consecutive increases of three-quarters of a percentage point.

“This may enable us to evaluate more data as we move the policy rate closer to a sufficiently restrictive level, making an allowance for the risks around our dual-mandate goals,” she said.

Brainard pointed to a lot of areas where she sees inflation starting to come back down.

She noted weaker numbers recently in retail sales and wages, and expressed doubt that the economy is seeing a Nineteen Seventies-style wage-price spiral where higher earnings keep pushing prices higher and vice versa.

In keeping with the Fed’s preferred measure, personal consumption expenditures prices excluding food and energy, inflation has been running at a 3.1% annualized pace during the last three months, well below the 4.5% 12-month pace. That is still ahead of the Fed’s 2% goal, but reflective of some progress.

Housing costs remain high, but Brainard and other Fed officials expect those to ease later within the yr as apartment leases meet up with declines in industrial real estate. Consumer surveys of late also show at while inflation expectations remain elevated within the near term, they’re more stable further out.

“Together, the value trends in core goods and nonhousing services, the tentative indications of some deceleration in wages, the evidence of anchored expectations, and the scope for margin compression may provide some reassurance that we should not currently experiencing a Nineteen Seventies-style wage-price spiral,” Brainard said.

Despite tough talk from Fed officials on rates, markets think the central bank will fall in need of the 5.1% peak within the fed funds rate that they pointed to in December. As an alternative, traders see the speed topping out a couple of quarter percentage point below that, and the Fed starting to scale back rates later this yr.

Brainard gave no indication that rates can be coming down anytime soon.

“Inflation is high, and it is going to take time and resolve to get it back all the way down to 2%. We’re determined to remain the course,” she said.

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