Brainard asks the Federal Reserve to hold its nerve on inflation

A senior Federal Reserve official has warned that the US central bank needs to hold its nerve as it tries to tame soaring inflation, adding her name to the list of policymakers striking a hawkish tone about future rate hikes.

Lael Brainard, deputy chairman of the Fed, reinforced expectations that the central bank would choose a third consecutive 0.75 percentage point rate hike at its meeting later this month. “We’re in this as long as it takes to get inflation down,” she said.

Brainard said the Fed had “both the capacity and the responsibility”[ads1]; to maintain public confidence in its ability to keep inflation in check over the long term, adding higher interest rates that constrain the economy would be necessary “for some time.”

The strong intervention by Brainard, generally seen as dovish on monetary policy, comes as investors increased their bets that the Fed implements another 75 basis point hike when officials meet on September 21.

Futures markets on Wednesday suggested an 81 percent chance they will choose an increase of that magnitude.

Expectations of further big rate hikes have driven 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 nearly 15 percent in 2022. Sterling has fallen by the same magnitude to hover near its weakest level since 1985. The widening gap between the Fed’s tightening program and the Bank of Japan’s ultra-loose monetary policy has driven the yen to its lowest the level of 24 years.

Brainard, speaking at a banking industry conference in New York, said the Fed’s latest rate hikes had begun to cool some sectors of the US economy. At some point, she said, the central bank would have to assess the risk of overshooting with monetary policy that was too tight.

But she added that before the Fed considered easing its efforts to tame higher rates, it would need to see “several months of low monthly inflation readings” and be confident it is moving closer to its 2 percent target.

Brainard’s focus on inflation expectations underscored the Fed’s fear that sustained high inflation would 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 could result in lower inflation in the US, with Europe facing a weaker economy and a “severe energy shortage” as China expands its Covid lockdown measures.

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

Brainard said the U.S. labor market continued to “show significant strength” that she said was “difficult to reconcile [a] more depressing tone of activity”.

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

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

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

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

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