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Federal Reserve Board Governor Lael Brainard on Monday laid out a strong case for the central bank to maintain low interest rates, saying that the spike seen in inflation this year was transitory and the labor market was far from healed.
Brainard pushed back on some of her hawkish colleagues at the central bank, who are pressing the Fed to end its support for the economy in the form of bond purchases by the middle of next year in case the central bank needs to raise its short-term interest rates to cool off inflation.
In a speech to the National Association for Business Economics, Brainard said the spike in inflation seen this year was narrow and caused categories damaged by COVID disruptions.
“High inflation readings from the spring and early summer were disproportionately driven by a few sectors experiencing specific supply bottlenecks,” Brainard said.
“As those COVID related disruptions subside, most forecasters expect inflation to move back down towards our 2% long-run objective on its own. That’s the sense in which currently high inflation is likely to be transitory,” Brainard said.
“I expect inflation to decelerate, and pre-COVID inflation dynamics to return when COVID disruptions dissipate,” Brainard said. She said it is uncertain how fast inflation will slow down over the remainder of this year and next year.
Brainard said she didn’t see wage gains were pushing inflations higher.
At the same time, Brainard pushed back against economists who are arguing that the labor market is already “tight” and the unemployment rate won’t return to the low 3.5% rate see before the pandemic.
In her remarks, Brainard said she knew of “no reason employment should not return to levels as strong or stronger than we saw before the pandemic.” She said she was “confounded” by arguments that the labor market is tight.
The unemployment rate was 5.2% in August, still well above the 3.5% low seen in early 2020.
Brainard said the economy is still 5 million jobs short of the level of employment in early 2020 before the pandemic struck the U.S. economy. She said the unemployment rate adjusted for COVID-related nonparticipation remained elevated at 7.5 percent.
The Fed has vowed to hold its benchmark interest rate close to zero until the labor market returns to its “maximum sustainable” levels.
There is a record number of job openings now even though the unemployment rate is still relatively high.
Participation in the workforce, a key measure of strength of the labor market, has remained low, even as the effects of the economy from the pandemic has eased.
This has created a conundrum for economists.
Some argue that workers are retiring and so participation in the economy will remain permanently lower This means that the Fed shouldn’t hold short-term interest rates close to zero in hopes of returning to the 3.5% jobless rate, as that is no longer possible.
Brainard argued that the low participation appears to reflect COVID related constraints that have been prolonged by the delta variant rather than a permanent structural change in the economy.
A recent survey found that the number of workers who said they had left the job market because they were either sick with COVID or taking care of somebody who was sick with COVID, that more than double just between late July and early September.
Brainard’s remarks fit with her stance of one of the most dovish Fed officials. Some observers think President Joe Biden might tap Brainard to replace Fed Chairman Jerome Powell, whose 4-year term ends in early 2022. Brainard is the only remaining Fed governor not appointed by President Donald Trump.
Several other dovish Fed officials spoke Monday. New York Fed President John Williams said he expected inflation to fall back down to 2%.
And Chicago Fed President Charles Evans said he’s more worried about too little inflation than too much.
All three Fed officials didn’t raise any concern with the Fed’s plan to begin to slow down, or taper, its $120 billion per month in bond purchases.
Fed Chairman Jerome Powell strongly hinted that the tapering would be announced at the next Fed meeting in early November.
The yield on the 10-year Treasury note
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flirted with the 1.5% rate earlier Monday before settling back in afternoon trading. The yield has moved higher from a 1.3% rate seen before last week’s Fed meeting as analysts say the central bank’s decisions on tapering was a move in a hawkish direction.
