A top Federal Reserve official outlined the case against raising short-term interest rate targets Monday, weighing in against the central bank tightening monetary policy at its highly anticipated September meeting.
Governor Lael Brainard said in a speech in Chicago that the Fed should exercise “prudence” in raising rates, warning that the dangers of raising rates too much and choking off economic growth likely outweigh the risks of leaving money too loose.
“The case to tighten policy preemptively is less compelling” given signs that U.S. unemployment is likely to fall more slowly and place less upward pressure on inflation, Brainard said.
Throughout her speech, Brainard explained the logic that the U.S. economy might not be overheating, and that lower rates for longer might be needed to bring it to full strength. In particular, she noted that inflation has run below the Fed’s target for 51 straight months, a sign that the Fed is not keep rates too low. She also mentioned that events from abroad have propped up the dollar, with effects similar to the Fed raising rates.
And without clearer signs that inflation is rising too high, she said, “it would be unwise” to give up on driving unemployment even lower than it is today.
Brainard, a member of the Federal Reserve’s Board of Governors since 2014, has developed a reputation as one of the most “dovish” Fed officials in recent months. That is, she has aired concerns that the Fed may depress the economy and keep unemployment higher than necessary if it raises rates to combat higher inflation. In recent remarks she has argued that the evidence that inflation, which has been running close to 1 percent in 2016, will rise toward the Fed’s 2 percent target is weak.
Since it was announced last week that Brainard would be speaking Monday, investors had been anticipating her remarks in case they revealed key clues about the Fed monetary policy decision scheduled for Sept. 21.
Both she and fellow governor Daniel Tarullo have expressed skepticism about the Fed raising rates in the past week. Chairwoman Janet Yellen, on the other hand, suggested in her most recent public remarks that she was open to increasing the Fed’s short-term interest rate target this month, raising the question of whether she will encounter dissents if she pushes for such a move.
Asked directly if she would dissent if her colleagues voted to raise rates by an audience member Monday, Brainard declined to say. “My assessment…will continue to be based on the evolution of the data,” she responded.
