Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Fed's Brainard: Breakdown in inflation-unemployment relationship poses challenge

Published 05/16/2019, 02:18 PM
Updated 05/16/2019, 02:18 PM
© Reuters. FILE PHOTO: Federal Reserve Board Governor Lael Brainard speaks at the John F. Kennedy School of Government at Harvard University in Cambridge

© Reuters. FILE PHOTO: Federal Reserve Board Governor Lael Brainard speaks at the John F. Kennedy School of Government at Harvard University in Cambridge

WASHINGTON (Reuters) - The relationship between slack in labor and other core resource markets and inflation has "broken down," posing risks for the Federal Reserve if it fails to lift the pace of price increases to its announced target, a top Fed official said on Thursday.

Fed Governor Lael Brainard said the behavior of inflation, with unemployment at a 50-year low, was both "puzzling," and a problem if households and businesses lose faith that the Fed will meet its 2% target.

"The trend in inflation ... appears to be somewhat below the Federal Reserve’s goal of 2%," Brainard said. "This raises the risk that households and businesses could come to expect inflation to run persistently below the Federal Reserve’s target and could change their behavior in a way that reinforces that expectation," a difficult spiral to break.

The Fed is undertaking a year-long review centered around strategies for meeting the inflation target and addressing the weakened relationship between low unemployment and price increases. Under standard economic thinking, unemployment below a certain level, by raising incomes and wages, leads to higher inflation.

Among the remedies Brainard suggested would be to allow any future spike in prices, a sudden rise in import costs for example, to continue without a Fed response.

That "opportunistic reflation," she said, could "communicate that a mild overshooting of inflation is consistent with our goal."

She said the breakdown of the "Phillips curve" tradeoff between low unemployment and higher inflation also added to the case for stronger bank capital buffers and other regulatory steps to ensure financial stability.

Low unemployment is allowing workers to make gains, Brainard said, and the Fed does not want to interfere with that.

But continued low interest rates do add to risks of financial bubbles developing. Rather than raise rates to guard against financial sector problems, she said, tools like higher bank capital buffers could be relied on.

"Today’s economy is providing opportunities for workers who might previously have been left on the sidelines," said in prepared remarks to the National Tax Association. "Adding financial stability concerns to the burden of conventional monetary policy might undermine sustained achievement of our employment and inflation goals."

© Reuters. FILE PHOTO: Federal Reserve Board Governor Lael Brainard speaks at the John F. Kennedy School of Government at Harvard University in Cambridge

Other Fed officials have so far resisted Brainard's call to use a "counter cyclical capital buffer" to require banks to raise capital stockpiles during good times.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.