If policymakers from the major economies worked together, it would make monetary policy more effective, Federal Reserve Board Governor Lael Brainard said Friday.
"[W]ith anemic global demand and interest rates near zero, in some economies there is scope for monetary policy to be more effective with fiscal policy working in the same direction," Brainard told a monetary policy forum in New York, according to prepared text released by the Fed. "With potential growth and nominal borrowing rates both low, public investment that increases potential in the longer run and demand in the shorter run could make an important contribution. A joint determination by policymakers across major economies to better deploy policy tools to provide support for global demand could be beneficial."
Looking to the U.S., she said, with core personal consumption expenditures remaining soft despite the labor market's "substantial improvement," raises the question of whether the traditional "relationship between employment gains and stronger inflation" holds true.
"Moreover, the softening in market-based measures of inflation expectations and some hints of weakening in survey measures deserve our attention," Brainard said. "This deterioration in inflation expectations and a weakened link between labor market tightening and inflation--together with the asymmetry of policy in the vicinity of the lower bound--lead me to put a high premium on evidence that actual inflation is firming sustainably."
If core inflation stays too low in all "major advanced economies and inflation expectations remain under pressure in many, I might expect policy divergence to remain more limited than previously predicted."
