Federal Reserve Vice Chair Lael Brainard said Thursday that high inflation in the United States is slowing and suggested that it is possible that the Fed’s interest rate hike could slow the pace of inflation without causing large job losses.
Speaking in Chicago, Brainard sketched a more optimistic outlook for inflation than some Fed speakers has been in recent days.
At the same time, Brainard warned of inflation still high and said that the governor should continue to borrow rates raised “for some time” to prevent price growth. He has not clearly signaled whether he will support a quarter-point or half-point rate hike in the Fed’s benchmark short-term rate at the Fed’s next Jan. 31-Feb. 1.
But Brainard suggested that smaller rate hikes would make it easier for the Fed to gradually assess how rate hikes affect inflation and the overall economy. Most economists think the Fed will raise its key rate by a quarter point at its next meeting. That move follows a half-point rate hike in December and four three-quarter-point hikes before that.
Brainard, an influential policy voice close to Chair Jerome Powell, pointed to several trends that he said are likely to lower inflation in the coming months. The cost of things like cars, furniture and clothes is down, he said, along with energy prices.
There are also signs that the job market disheartening, including a drop in the average work week, which could signal smaller wage increases. Rapid wage growth can boost inflation if businesses respond by raising prices to offset their higher labor costs.
And Americans generally expect inflation to decline in the coming years, Brainard said. That is an important step because when people think that prices will continue to rise, they will change their behavior by speeding up their purchases before prices rise. They may also push for higher wages to offset rising costs, thereby exacerbating inflation.
All of those factors, says Brainard, “may provide some assurance that we are not currently experiencing a 1970s-style wage-price spiral.”
“For these reasons,” he continued, “it remains possible” that high inflation can be prevented “without significant job losses.”
Fed officials face a series of increasingly difficult and high-stakes decisions. After a series of big rate increase last year, the central bank raised its benchmark interest rate closer to a level that officials believe will eventually curb inflation. That level is now the highest in 15 years: 4.25% to 4.5%.
At the same time, the Fed’s key rate is again approaching levels that may be higher than needed to beat high inflation – a miscalculation that would likely send the economy into a recession.
Brainard departed from the Fed’s most recent speakers by not specifying the final level he thinks the Fed’s key rate should reach. Most other Fed officials who spoke this week said it should be above 5%.
He also distanced himself from many of his peers by suggesting that wage increases for employees in restaurants, retail stores and other service businesses are not necessarily driving higher prices. However, he suggested that other factors are also at play, including the passing on of higher fuel prices to services such as air fares and shipping costs. He also noted that some companies are raising prices more than their costs are rising.
As supply chains continue to falter, consumers slow their spending and more companies get rid of excess inventories, Brainard said, those margins should shrink and “could contribute to disinflationary pressures.”
Some recent signs suggest the economy is weakening. The housing market has been severely damaged by higher mortgage rates. this week, a retail sales report showed that Americans picked up their spending last month, although some of the decline reflects lower prices for cars, gas, and other goods. Manufacturing output fell. And surveys of service companies and factories earlier this month pointed to a drop in production.
Some Fed officials echoed a hard line on inflation and emphasized that they still support raising the central bank’s key rate above 5%. Some officials favor a full percentage point additional rate increase.
“We’re not at 5%, we’re not at more than 5%, which I think should be given where my projections are for the economy,” said Loretta Mester, president of the Federal Reserve Bank of Cleveland, on Tuesday. in an interview with The Associated Press.
A combination of even higher rates and gloomy economic data helped send financial markets tumbling on Wednesday, with a slight decline continuing on Thursday.
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