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‘We are determined to stay the course’

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Federal Reserve Vice Chair Lael Brainard said Thursday afternoon that while there are encouraging signs inflation has come down, the central bank should stay the course in making monetary policy more restrictive to slow price increases in the economy.

“Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2 percent on a sustained basis,” Brainard said in a speech at the University of Chicago School of Business. “We are determined to stay the course.”

The Fed is focused on the strength of the job market and wage growth as it relates to inflation, and Brainard said the recent drop in growth of average hourly earnings, temporary-help services, and monthly payrolls suggest tentative signs the labor market is cooling.

“Together, the price trends in core goods and nonhousing services, the tentative indications of some deceleration in wages, the evidence of anchored expectations, and the scope for margin compression may provide some reassurance that we are not currently experiencing a 1970s-style wage–price spiral,” she said.

Brainard said she will be watching to see whether the employment cost index data at the end of this month shows a continued slowdown from the third quarter to the fourth quarter.

Federal Reserve Board Governor Lael Brainard testifies before a Senate Banking Committee hearing on her nomination to be vice-chair of the Federal Reserve, on Capitol Hill in Washington, U.S., January 13, 2022. REUTERS/Elizabeth Frantz

Brainard also said Wednesday’s industrial production index points to a significant weakening in the manufacturing sector, and noted the December retail sales report points to further moderation in consumer spending.

Looking ahead, Brainard said weaker readings on real income, wealth, and sentiment, along with spending on services — including the ISM services index — point to subdued growth this year.

When asked what impact unwinding the Fed’s balance sheet is having, Brainard said estimates for the impact are probably 50-75 basis points of tightening.

Elsewhere on Thursday, Boston Fed President Susan Collins said she expects further rate increases, but at a slower pace, pointing to still-high services inflation driven by wage growth.

“There is more work to do,” Collins said. “I anticipate the need for further rate increases, perhaps at a slower pace, depending on incoming data, before holding rates at a sufficiently restrictive level for some time.”

Collins said she thinks rates – which stand in the range of 4.25-4.5%— will need to be raised to just above 5% before holding them there for some time.

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