26 August 2019
US rate hike cycle could continue for two more years, Fed Governor Lael Brainard has suggested. Photo: Reuters
US rate hike cycle could continue for two more years, Fed Governor Lael Brainard has suggested. Photo: Reuters

Fed official sees room for rate hikes over two more years

The US central bank has room to raise interest rates over the next couple of years without slowing economic growth, a Fed board member said on Wednesday.

With economic growth strong, unemployment at 3.9 percent and inflation near the Fed’s 2.0 percent goal, further gradual interest rate rises are likely to be appropriate over the next year or two, Fed Governor Lael Brainard said in a speech, Reuters reports. 

Her phrasing, in a talk at the Detroit Economic Club, echoed recent comments from Fed Chair Jerome Powell that had already begun to lay the groundwork for a longer-than-expected rate-increase cycle, the report noted. 

But Brainard went further, laying out in detail the thinking behind a rate hike cycle that could continue “over the next year or two,” rather than pausing next year as policymakers including the Dallas and Atlanta Fed chiefs have said could make sense. 

In her view, outlined for the first time in the speech, stimulus from tax cuts and government spending under US President Donald Trump are lifting the short-term neutral level of interest rates. 

A rise in the neutral level gives more headroom for the central bank to lift rates without slowing growth. 

“With fiscal stimulus in the pipeline and financial conditions supportive of growth, the shorter-run neutral interest rate is likely to move up somewhat further, and it may well surpass the longer-run equilibrium rate for some period,” Brainard was quoted as saying. 

It is this shorter-run neutral rate, and not the longer-run neutral estimate that is published each quarter by the Fed, that is the “relevant benchmark” for monetary policy, the Fed governor said.

In her speech, Brainard downplayed the economic effect of business worries about the Trump administration’s trade war with China and other trading partners.

Uncertainty about trade policy poses downside risks, just as easy financial conditions and tight labor markets pose upside risks to the economy, Brainard said.

So far, though, higher tariffs are not having a “discernible” effect on prices or confidence, she said.

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