US Fed Vice Chair: Federal Reserve could overdo interest rate hikes

By Al Mayadeen English
Source: Agencies
8 Sep 2022 10:34

US Federal Reserve Vice Chair Lael Brainard was more inclined than her boss to accept that there are significant dangers to both increasing rates too high as well as risks not raising them high enough.

Vice Chair of the Federal Reserve Lael Brainard

The Vice Chair of the Federal Reserve, Lael Brainard, admitted the possibility that the US Federal Reserve could cross a threshold in its continuous interest rate hike, a remark that was conspicuously absent from Chair Jerome Powell's address at Jackson Hole, Wyoming, in late August.

Brainard said in a speech delivered in front of a banking group in New York that "At some point in the tightening cycle, the risks will become more two-sided," adding that the velocity with which interest rates rise and the uncertainty surrounding the timing of their economic consequences "create risks associated with overtightening."

Furthermore, the Vice Chair warned that history showed that "it is important to avoid the risk of pulling back too soon" noting that when it comes to inflation, "our resolve is firm, our goals are clear, and our tools are up to the task."

While both Brainard and Powell appear to be completely on board with the Fed's drive to rapidly raise interest rates to combat inflation, Brainard was more inclined than Powell to accept that there are significant dangers to both increasing rates too high as well as risks not raising them high enough.

US Senator Elizabeth Warren and other political figures have argued that firms are profiting at the expense of high inflation.

Brainard is acknowledging evidence that the peculiar conditions of the pandemic have permitted businesses to boost prices in ways that are out of line with their own costs, even if she does not entirely endorse that narrative.

On the topic of inflation, Brainard further stated that "a reduction in currently elevated margins... could make an important contribution to reduced inflation pressures in consumer goods," adding that "overall retail margins have risen significantly more than the average hourly wage that retailers pay workers to stock shelves and serve customers over the past year, suggesting that there may also be scope for reductions in retail margins."

US Federal Reserve Chair stated in his August speech

While failing to fight the current 40-year high prices in the US would be harmful, controlling high inflation would also inflict "pain" on families and businesses in the country, US Federal Reserve Chair Jerome Powell said in August during a speech to global policymakers.

In the annual gathering of central bankers in Wyoming's Jackson Hole, Powell spoke and did not hesitate or leave room for doubt about the central bank's course, vowing to act "forcefully."

He warned the US is likely to slow for a continuous and extended period, and the strong job market will suffer in order to decrease the prices, describing the situation as the "unfortunate costs of reducing inflation."

The Fed has been on a combative campaign to higher interest rates, and Powell made it clear in his speech that the fight against inflation is not over.