The Fed should be patient while the future outlook is cloudy, Federal Reserve Board Governor Lael Brainard said Monday.
“In today’s circumstances, policy could usefully follow two simple guidelines. First, we should not take the strength in the U.S. labor market and consumption for granted. Given weak and decelerating foreign demand, it is critical to carefully protect and preserve the progress we have made here at home through prudent adjustments to the policy path. Tighter financial conditions and softer inflation expectations may pose risks to the downside for inflation and domestic activity. From a risk-management perspective, this argues for patience as the outlook becomes clearer,” she told the Institute of International Bankers, according to prepared text released by the Fed. “Second, we should put a high premium on clear evidence that inflation is moving toward our 2 percent target.”
Brainard noted inflation has underperformed in the recent past and some inflation measures suggest “inflation expectations may have edged lower.” As a result, she said, “we should be cautious in assessing that a tightening labor market will soon move inflation back to 2 percent. We should verify that this is, in fact, taking place. In this regard, core PCE inflation increased 1.7 percent over the 12 months ending in January, a noticeable step-up from an increase of 1.3 percent over the preceding 12 months.”
Turning to energy, Brainard warned, “[A] stabilization in energy prices is not assured.” The depth and persistence of oil price declines have surprised market participants. Also the rise in value of the dollar has held down inflation. "Should the dollar stabilize, the downward influence on inflation should dissipate,” she said.
However, the dollar’s rise has also “been more persistent than markets and many observers expected.”
Should labor market improvement continue, she noted, “Higher resource utilization should also put some upward pressure on inflation going forward. However, the effect of resource utilization on inflation is estimated to be much lower today than in past decades.”
