Apr 5, 2022 - Economy & Business

Lael Brainard puts "paramount importance" on reducing inflation

Fed governor Lael Brainard

Fed Governor Lael Brainard in 2021. Photo: Al Drago/Bloomberg via Getty Images

High inflation damages the quality of life of lower-income families more than those with more resources, a top Federal Reserve official said, and the Fed is prepared to take "stronger action" than now envisioned if needed to bring it down.

Driving the news: Lael Brainard, a Fed governor awaiting Senate confirmation to be vice-chair, said in a speech that the central bank plans to tighten monetary policy "methodically," including with a series of interest rate increases and by shrinking its $9 trillion balance sheet "considerably more rapidly" than in the last economic cycle.

What they're saying: "It is of paramount importance to get inflation down," Brainard said at a Minneapolis Fed conference on inflation and inequality.

The details: Brainard pointed to several reasons low-income families feel the pinch of inflation worse than their more affluent counterparts.

  • Low-income families, Brainard said, spend 77% of their income on necessities, compared to 31% for high-income families. That means that when those necessities become more expensive, affluent families can more easily handle it by cutting back on discretionary purchases.
  • Brainard also noted that low-income families may have less room to adjust to high inflation by cutting to cheaper versions of the same goods because they already buy the cheap version.
  • Breakfast cereal is an example. Brainard notes that a family that already buys name-brand cereal can deal with inflation by switching to a generic brand. Not so much the family that already buys the cheaper generic brand.

Between the lines: Brainard's comments on policy signal that the Fed is likely to raise interest rates by half a percentage points at a meeting that concludes May 4, and shrinking its balance sheet.

  • However, her comment that the Fed "is prepared to take stronger action if indicators of inflation and inflation expectations indicate that such action is warranted" is a signal the central bank could go further than now planned.
  • Conversely, she mentioned that she is "attentive" to signals from the yield curve — the gap between short-term and longer-term bond yields that can be a recession predictor, and other data that suggests downside risks."
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