Fed Vice Chair Brainard: No.1 challenge is getting inflation down, expect some cooling of the economy

Vice Chairwoman of the US Federal Reserve Lael Brainard said on Thursday that the Fed is seeing mixed signals on the economy, but the number one priority remains getting inflation down, reported Reuters citing an interview on CNBC. Brainard added that she does expect to see some cooling of the economy over time, and that she does expect to see some moderation and a better balance in the labour market. 

Regarding moderation of inflation and the economy, Brainard warned that it too early to say that the Fed is seeing this, and that she wants to see a consistent string of data showing this is the case. There's a fair amount of uncertainty, she continued, though she added that its clear that the Fed needs to get inflation down. 

There is a path to do this with a growing economy and moderating labour market, she continued, adding also that there is a path to see demand cooling, inflation coming down and the labour market still strong. Economists refer to this as a "soft landing". 

The economy has a lot of momentum, Brainard added, noting that the Fed is going to do what is necessary to bring inflation back down. Businesses, households and balance sheets are starting this process from a very healthy position, she continued. 

Financial conditions have tightened quite a lot and are a lot tighter than pre-pandemic levels, Brainard observed. While the Fed cannot affect supply shocks, Brainard said the central bank has confidence that it has the tools to start cooling demand, adding that monetary policy transmission is already working. 

Brainard noted that market expectations for 50 bps rate hikes at the next two meetings seem like a reasonable path, before adding that, regarding September's meeting, its harder to say, as she does not have a clear sense of where the economy will be in September. If inflation hasn't sufficiently decelerated, it may be appropriate for another 50 bps rate hike, she said. 

Conversely, if demand does moderate and inflation decelerates then the pace of hikes could slow to that prices by markets (25 bps per meeting). It is important to keep in mind that while the Fed is raising interest rates, it is also shrinking its balance sheet, Brainard added, and this is also tightening financial conditions. 

Quantitative Tightening might be worth another 2-3 rate hikes, she stated and the Fed takes this into account when assessing financial conditions.