Economist's Insights

Fed Governor Brainard Expects Normalization to Begin Soon, Cautiously Watching Inflation to Decide on Another Rate Hike

Jul 11, 2017

Fed Governor Brainard was Tuesday’s most anticipated Fedspeaker as Minneapolis Fed President Kashkari’s actions – dissented to last two rate hikes and offered lengthy and detailed explanations as to why – have made his positions well known. In a speech focused on monetary policy and titled “Normalizing Central Banks’ Balance Sheets”, Brainard laid out a case for beginning to normalize the Fed’s balance sheet “soon” if the labor data remained strong and economic activity firmed. She said after four hikes, she considers normalization of the overnight rate to be “well under way” – a milestone commonly used by the Fed to mark when phasing out reinvestments can begin. Brainard showed less confidence and little urgency when discussing the overnight rate. Her belief that the neutral (real) rate for fed funds is currently close to zero tells her the Fed doesn’t “have much more additional work to do,”.  Before she agrees to another rate hike, Brainard said she “will want to monitor inflation developments carefully, and to move cautiously on further increases in the federal funds rate, so as to help guide inflation back up around our symmetric target.”