Brainard Warns US Rates to Stay High, Points to Global Impact

WASHINGTON — Federal Reserve Vice Chair Lael Brainard said Friday that U.S. interest rates will likely have to stay high for an extended period to combat inflation, ending a week of harsh rhetoric for part of the Fed officials.

Speaking at a conference hosted by the Federal Reserve Bank of New York, Brainard said international turmoil still threatens to disrupt global supplies of basic goods and manufactured parts, a key factor driving inflation higher. Additional inflationary shocks from Russia’s invasion of Ukraine, China’s COVID lockdowns, or global severe weather events “cannot be ruled out,” he said.

“Weather conditions in several areas, including China, Europe and the United States, are exacerbating price pressures due to disruptions to agriculture, shipping and utilities,” Brainard said.

Last week, the Fed raised its benchmark interest rate by three-quarters of a percentage point for the third time in a row, a larger increase than its usual quarter-point hike as it battles inflation that recently hit a four-decade high. . The Fed has raised its short-term benchmark rate to a range of 3% to 3.25%, the highest since early 2008, from almost zero in March. That is the fastest rate of increase in four decades.

Interest rates will need to stay high “for some time to have confidence that inflation is coming back” to the Fed’s 2% target, he added. “For these reasons, we are committed to avoiding rolling back prematurely.”

Brainard also addressed concerns that rapid interest rate increases by central banks around the world are increasing the risks of global financial turmoil and recessions.

Nine central banks representing half the world economy have raised their key interest rate by 1.25 percentage points in the past six months, Brainard said, a “fast pace by historical standards.”

Maurice Obstfeld, a former chief 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 should consider the actions of other central banks when setting their own rates,” he wrote on the website of the Peterson Institute for International Economics, where he is currently a fellow. “To avoid an economic slowdown beyond what is necessary to control inflation, central banks should coordinate a softer collective tightening of monetary policy and clearly communicate their intentions.”

In his comments, Brainard acknowledged that the Fed’s moves affect other economies abroad. Higher interest rates in the US raise the value of the dollar, for example, and slow down the domestic economy, reducing the amount of goods Americans buy abroad.

Central bank moves in other countries also have an impact on the US, he added.

His comments followed widespread turmoil in financial markets last week after the government of newly installed UK Prime Minister Liz Truss unveiled a package of deep tax cuts that could further stimulate consumer spending and exacerbate the already high inflation in that country.

The move pushed the value of the British pound to record lows against the dollar and caused sharp increases in UK bond yields, forcing the Bank of England to intervene by buying UK bonds to stabilize financial markets. The turmoil also caused big swings in the US bond market, as rates on the 10-year US Treasury bond, which influences mortgage rates, rose and then fell.

Brainard did not mention developments in the UK, but said the Fed is “keep an eye on financial vulnerabilities” and engages in “frequent and transparent communications” with other central banks around the world.

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