With mixed economic signals, and downside risks, it would be "prudent" for the Federal Open Market Committee to hold off raising the fed funds rate target, Federal Reserve Board Governor Lael Brainard said Friday, adding, the current rate may be closer to neutral than previously believed.
"Recognizing the data we have on hand for the second quarter is quite mixed and still limited, and there is important near-term uncertainty, there would appear to be an advantage to waiting until developments provide greater confidence," Brainard told the Council on Foreign Relations, according to prepared text released by the Fed. "Prudent risk management would suggest the risks from waiting until the totality of the data provides greater confidence in a rebound in domestic activity, and there is greater certainty regarding the 'Brexit' vote, seem lower than the risks associated with moving ahead of these developments."
Brainard suggested the fed funds "neutral rate may be lower and today's federal funds rate closer to neutral than previously anticipated. Although we cannot observe the neutral rate directly, a variety of models suggests that it is currently very low relative to historical norms."
The dynamics keeping the economy from further growth "are likely to persist, the appropriate path of policy is likely to remain shallow for several years," she said.
"[W]ith the recovery well into its seventh full year, credit in many markets is widely available, while consumer confidence and household net worth are at high levels," Brainard added. "As a result, it appears more likely that much of the decline in the neutral rate is likely to prove persistent, consistent with a variety of estimates."
Also it will be important to stress that moves are data dependent, Brainard said, and following a move, "it will be important that it be understood that any subsequent moves would be conditioned on further evidence confirming continued progress toward our objectives and not as inevitable steps on a preset course."
The path to normalization could be "quite shallow and gradual in the medium term."
While consumption appears to be rising, the labor market growth appears to be slowing. "We cannot take the resilience of our recovery for granted." Brainard said the FOMC needs to determine if "data provide confidence that domestic economic activity has strengthened notably following two disappointing quarters."
Inflation data have been mixed. While oil prices rise and the dollar weakens, prices should steady this quarter, she noted. However, these developments are at least partially related "to expectations of more gradual U.S. monetary policy tightening. If those expectations were to shift materially, the conditions supporting higher inflation could diminish."
Downside risks include the Brexit as well as "the possible reemergence of risks surrounding China and emerging market economies," Brainard said.
"The fragility of the global economic environment is unlikely to resolve any time soon," she said. "Growth in the advanced economies remains dependent on extraordinary unconventional monetary policy accommodation, while conventional policy continues to be constrained by the zero lower bound. Conventional policy, whose efficacy is more tested and better understood than unconventional policies, can respond readily to upside surprises to demand, but presently would be constrained in adjusting to downside surprises. This asymmetry in the capability of policy effectively skews risks to the outlook to the downside."
