WASHINGTON – Federal Reserve Vice Chair Lael Brainard said Friday that U.S. interest rates will likely have to remain high for an extended period to combat inflation, capping a week of tough rhetoric by Fed officials.
In remarks at a conference hosted by the Federal Reserve Bank of New York, Brainard said that international turmoil still threatens to disrupt global supplies of commodities and manufactured parts, a key factor pushing inflation higher. Additional inflationary shocks from Russia's invasion of Ukraine, China's COVID lockdowns, or severe weather events globally “cannot be ruled out,” she said.
“Weather conditions in several areas, including China, Europe, and the United States, are exacerbating price pressures through disruptions to agriculture, shipping, and utilities,” Brainard said.
Droughts in much of the U.S. this year have contributed to higher food prices.
Last week, the Fed raised its benchmark interest rate by three-quarters of a percentage point for the third straight time, a heftier increase than its usual quarter-point hike, as it fights inflation that recently reached a four-decade high. The Fed has pushed its benchmark short-term rate to a range of 3% to 3.25%, the highest since early 2008, up from nearly zero in March. That is the most rapid pace of increases in four decades.
Interest rates will need to stay high “for some time to have confidence that inflation is moving back” to the Fed's 2% target, Brainard said. “For these reasons, we are committed to avoiding pulling back prematurely.”
A government report Friday showed that the inflation gauge the Fed prefers rose 0.3% in August from July, while excluding the volatile food and energy categories, core prices jumped 0.6%, more than most economists forecast. The increases may make a fourth big rate hike more likely when the Fed next meets in November, economists said.
Inflation rose 6.2% from a year ago, the report said, down from a 7% spike in June that was the fastest in four decades. But core prices have accelerated, and are up 4.9% in August from a year ago, faster than July's annual pace of 4.7%.
Brainard also addressed concerns that rapid interest rate hikes by central banks around the world are raising the risks of global financial turmoil and recession.
Nine central banks accounting for half the global economy have lifted their key interest rate by 1.25 percentage points in the past six months, Brainard said, a “rapid pace by historical standards."
Maurice Obstfeld, formerly the top economist at the International Monetary Fund, warned earlier this month that the combined interest rate hikes by so many central banks could amplify their impact.
“Policymakers must consider other central banks’ actions when setting their own rates,” he wrote on the Peterson Institute for International Economics' website, where he is currently a fellow. “To avoid an economic slowdown beyond what is needed to bring inflation under control, central banks should coordinate a gentler collective tightening of monetary policy and clearly communicate their intentions.”
In her remarks, Brainard acknowledged that the Fed's moves affect other economies overseas. Higher interest rates in the U.S. push up the value of the dollar, for example, and slow the domestic economy, both of which reduce the amount of goods Americans buy from overseas.
Moves by central banks in other countries also have impacts on the U.S., she added.
Her remarks followed widespread disruptions in financial markets in the past week after newly-installed U.K. Prime Minister Liz Truss' government unveiled a package of steep tax cuts that could spur more consumer spending and exacerbate already-high inflation in that country.
The move pushed the value of the British pound to record lows against the dollar and caused sharp spikes in U.K. bond yields, forcing the Bank of England to intervene by purchasing U.K. bonds to stabilize financial markets. The turmoil also caused large swings in the U.S. bond market, as rates on the 10-year U.S. Treasury note, which influences mortgage rates, jumped and then fell back.
Brainard did not mention developments in the U.K., but said the Fed is “attentive to financial vulnerabilities” and engages “in frequent and transparent communications” with other central banks around the world.
Other officials this week have also emphasized that the Fed has to keep pushing rates higher to counter inflation.
“So no matter how you cut it, I’m afraid we have quite a bit of inflation in the U.S., way above our 2% inflation target,” said James Bullard, president of the St. Louis Fed, on Thursday. “That’s why the committee has moved aggressively this year.”
Mary Daly, president of the San Francisco Fed, said in a speech Thursday that the Fed has to get inflation under control to stabilize the economy and support more growth and hiring in the long run.
“We expect to raise the (Fed's key interest) rate further in coming meetings, in the course of early next year as well, because the economy needs more bridling in order to bring demand back in line with supply,” she said.