Federal Reserve Vice Chair Lael Brainard has brought a message of hope to markets following the ECB’s ‘hawkish’ tone this morning. Brainard believes it is still possible to achieve the ‘soft landing’ of calming inflation without major job losses. But to get that ‘happy ending’, you need keep the pulse of the high rates for a few more monthsuntil making sure that the IPV returns to its normal rate, he warned.
“Even with the recent moderation, inflation remains high, and monetary policy will need to be tight enough for some time to ensure that inflation returns to 2% on a sustained basis,” he told an event at the University of Chicago.
Recent inflation figures indicate a slowdown in the prices of services, except for housing, a sector closely watched by the Fed. In addition, good data for basic goods indicates that the economy is unlikely to enter a wage-price spiral that drives prices up out of control, Brainard said.
Therefore, it remains possible that a continued moderation in aggregate demand could facilitate the easing of pressures on the labor market, leading to a reduction in inflation without significant job lossesBrainard said.
The board did not comment on whether it will support a 25 basis point rate hike at the next Fed meeting, scheduled for February 1, as markets expect. Brainard also did not venture what he believes will be the maximum target rate for this year. In the last meeting, the ‘dot plot’ revealed that the average of the members of the management of the central bank expects rates to peak around 5.1%, while the markets expected a little less, 4.9%. , followed by cuts in the second half of the year.
Brainard said economic data for the past few months shows a cooling demand and consumer wages and tighter financial conditions, a welcome development for the central bank.
Some effects “yet to come”
At its last meeting in December, the Fed slowed the pace of rate hikes to half a percentage point, after four consecutive 75 basis point hikes. The downshift “will allow us to assess more data as we move monetary policy closer to a sufficiently tight level, taking into account the risks” they pose to its goal of achieving full employment, Brainard said.
“The full effect on demand, employment and inflation of the cumulative tightening that is underway is likely yet to come,” Brainard said. “That said, there is uncertainty about the pace and magnitude” of the increases needed to tame inflation, he concluded.