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Powell explains why the Fed will not 'promote a greener economy'
00:59 - Source: CNN Business
Minneapolis CNN  — 

The Federal Reserve is seeing progress in its battle to bring down US inflation and remains laser-focused on reaching the Fed’s 2% target — but policy will have to remain restrictive for “some time” to come.

That’s the message Thursday from Fed Vice Chair Lael Brainard, speaking at the University of Chicago Booth School of Business.

“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% on a sustained basis,” Brainard said.

Last year, the Federal Reserve undertook a series of seven rate hikes, bringing the benchmark rate from near zero to a range of 4.25% to 4.5%. After four consecutive blockbuster hikes that were three-quarters of a point in size, the Fed downshifted during its last meeting, approving a half-point increase.

That slower pace allows the Fed to pore through more data and assess the risks that come with tightening while trying to maintain the other end of its dual mandate: maximum employment.

“It takes a while for monetary tightening to really work through and observe [the effects],” she said. “But right now where we are, which we moved very quickly, we’re now in restrictive territory. We’rpe probing for what we call the sufficiently restrictive level of the rate at which we can be confident that inflation is going to come down over time.”

Inflation has declined in recent months, she said, noting data points such as the declining Producer Price Index that suggests a weakening in manufacturing, falling retail sales that suggest pullbacks in consumer spending, and drops in disposable income that suggest Americans are running down their savings.

“Looking forward, weaker readings on real income, wealth, and sentiment, along with indicators of spending on services, such as the ISM services index, point to subdued growth in 2023,” she said.

The US labor market is showing some “tentative signs” of cooling, she said, noting declines in weekly hours, temp services and monthly payroll growth. However, the job market is likely to stay tight due in part to a flattening out of the labor force participation rate, which remains about 1 percentage point below pre-pandemic levels, she said.

Still, Brainard said she believes it’s possible the Fed could achieve a soft landing — a reduction in inflation without a significant amount of job loss.

“This being a global phenomenon has really created a very unique set of challenges,” she said. “That said, I’d say for the United States, recent data suggests slightly better prospects that we could see continued disinflation in the context of moderate growth.”

The next two-day meeting for the Fed’s rate-setting committee starts January 31. Expectations are for the central bank to raise rates by a quarter point, according to the CME FedWatch tool.