Economist's Insights

Brainard Expects Another Rate Hike Soon, But May Balk at Much More With Inflation Soft

May 30, 2017

Comments from Fed Governor Brainard made headlines Tuesday given her ascribed role as a proxy for Chair Yellen’s current thought process. Consistent with messaging in the May Minutes last week, Brainard seems committed to another rate hike fairly soon. She pointed to key positives in the form of a brighter global outlook and the expectation for a second quarter bounce back in U.S. economic activity. However, she cautioned that “lack of progress” in core inflation is a “source of concern”. She also noted that recent weakness in inflation readings and the stubbornness of price pressures to respond to a tightening labor market could cause her to reassess her forward path if such weakness persisted. This segued into comments on the neutral rate in which she speculated the rate was “very low” and that “we are not far at all from neutral.” On the balance sheet, she expects another couple of rate hikes could satisfy the “well under way” threshold for normalization needed to begin a gradual phasing out of cash flow reinvestments.