At ɫӰ, Fed official urges cautious approach to rate hikes
As the Federal Reserve considers raising interest rates for the first time in seven years, a top Fed official urged her fellow policymakers to take “a cautious and gradual approach” and explained why interest rates likely will remain low for years to come.
A “new normal” has emerged since the federal funds rate has been held close to zero following the 2008 financial crisis, Federal Reserve Governor Lael Brainard said at a Dec. 1 event hosted by the ɫӰ Institute for Economic Policy Research.
“The new normal is likely to be characterized by a lower level of interest rates than in the decades preceding the crisis, which in turn, counsels a cautious and gradual approach to adjusting monetary policy,” she said. “In short, ‘gradual and low’ is likely to be the new normal.”
Economists and much of the financial world have been clamoring for details about the Fed’s widely expected move to raise the federal funds rate and its strategy on how it would adjust monetary policy to economic conditions.
Brainard refused to divulge any specifics about the Fed’s policy trajectory, or whether she would oppose a rate liftoff when the Federal Open Market Committee meets in Washington on Dec. 15-16. Various Fed policymakers, including Fed Chair Janet Yellen, have signaled in recent weeks that the growth in the economy will likely trigger interest rate action. But the question – and the debate among the policymakers – about the timing and pace of the adjustments remain.
Traditionally, a hike in the federal funds rate, which impacts short-term interest rates, is used to keep inflation in check and temper an economic expansion.
Brainard, who became a member of the Fed’s Board of Governors in 2014, has been outspoken about her stance on a loose monetary policy as well as the use of unconventional methods to tweak the economy.
Photos by Steve Castillo
Her speech at ɫӰ was among a dozen public appearances that top Fed officials were making in advance of the highly anticipated FOMC meeting.
Though inflation is near the 2 percent target and the unemployment rate has fallen to the 5 percent goal, some “puzzles” remain about the labor market, such as why compensation measures have remain depressed, Brainard said.
Brainard said other factors, including a deterioration in foreign growth and risk sensitivity in the market, are placing downward pressure on the neutral rate, or the federal funds rate which would neither hurt nor help the economy.
“The lower neutral rate means the normalization of the federal funds rate is likely to follow a more gradual and shallower path than in previous cycles, although the actual path will be determined by economic conditions," she said.
The Feds will have to look “very carefully” at the economic data as they proceed.
With so many variables to consider, “the way monetary policy works is imperfect,” Brainard said. “It’s not just what the economy is today but how expectations are formed in the long run – after the shocks have all died down.”
Before taking office at the Federal Reserve System, Brainard, a graduate of Wesleyan University and Harvard University, held a variety of public and private sector positions, including Undersecretary of the U.S. Department of Treasury, economic adviser to President Clinton, and founding director of the Global Economy and Development Program at the Brookings Institution. She was also a faculty member at the Massachusetts Institute of Technology.
Brainard is the latest policy insider to speak at an event organized by the ɫӰ Institute for Economic Policy Research. Peter Orszag, a former White House budget director, delivered a talk on health care in November.
“She is an example of what we do here at SIEPR, which is to bring together people from the academic world, the business world and the policy world, and Governor Brainard has excelled in all three of those orbits,” said Mark Duggan, the institute’s director.
May Wong is a freelance writer.