Sep 30, 2022 - Economy

Fed's Brainard: Interest rate risks may become more two-sided

Fed vice-chair Lael Brainard

Fed vice-chair Lael Brainard. Photo: Al Drago/Bloomberg via Getty Images

The Fed faces dual risks of raising interest rates too much or too little, its No. 2 official said in a speech Friday morning delivered against the backdrop of a tumultuous period for world financial markets.

Driving the news: Global interest rates have soared and stock markets plunged as investors react to concerted monetary tightening by the Fed and other central banks. In her new speech, Fed vice chair Lael Brainard emphasized that the Fed will proceed both "deliberately and in a data-dependent manner" in its policy.

  • "We are committed to avoiding pulling back prematurely," Brainard said at a conference at the New York Fed, according to a prepared text of her speech. But, she added, "we also recognize that risks may become more two-sided at some point."
  • Moreover, she said, "uncertainty is currently high, and there are a range of estimates" about how high interest rates will need to move.

Between the lines: The speech does not suggest that the Fed is reevaluating its rate-hiking plans amid global market tumult. But it is an acknowledgment of the risks of pushing interest rates too high and triggering a global recession that would rebound and damage the U.S. economy further.

  • The Fed is in a delicate situation in which U.S. inflation data keeps coming in hot — including a report Friday morning that the Fed's preferred measure of inflation showed a 4.9% rise in consumer prices excluding food and energy over the last year.
  • The central bank is aiming to show its resolve as an inflation-fighter to prevent high inflation from becoming too entrenched, but in the process risks causing global distress as it tightens the flow of dollars.

What they're saying: San Francisco Fed president Mary Daly told reporters Thursday evening that she is looking at whether financial conditions have tightened more than should be expected, given the Fed's interest rate increases.

  • "If that's the case, then slowing the pace of increases but still heading for the right terminal rate would be appropriate," she said.
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