“It may take some time” for the full effect of tighter financial conditions to work their way through the economy, said Federal Reserve Vice Chair Lael Brainard said Wednesday at The Clearing House and Bank Policy Institute Annual Conference in New York. Eventually, “the disinflationary process here at home should be reinforced by weaker demand and tightening in many other countries,” she added.
While inflation has eased some in July, don’t expect the central bank to ease up on its tightening soon. “It will be necessary to see several months of low monthly inflation readings to be confident that inflation is moving back down to 2%,” Brainard said.
Of course, there are risks to the Fed’s path. The quick tightening policy, global nature, and “the uncertainty around the pace at which the effects of tighter financial conditions are working their way through aggregate demand, create risks associated with overtightening,” she said. She also pointed out that there’s a risk in the Fed pulling back too soon.
Brainard reinforced the Fed’s message that it will keep on its path for as long as it takes to bring inflation down. “So far, we have expeditiously raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further,” she said.
Update at 1:07 PM ET: Repeating her earlier stance, she said she’d like to see “clear regulatory guard rails” for cryptocurrencies, especially for stablecoins. “Stablecoins is one of those areas that has the most potential risk if not properly regulated..” She favors a liquidity backstop for stablecoins.
“I think there is really good work being done up at Capitol Hill” in that area. “I don’t know if and when that will come to fruition.”
1:12 PM ET: Any form of a potential central bank digital currency “would have to be intermediated,” Brainard said. Banks would play a role in a future U.S. CBDC, she said.
1:22 PM ET: “It’s important to be very transparent, very accountable” and to “stick to our statutory mandate” to operate as an entity that’s independent of political party, she said. The Fed has a “narrowly defined” area for its independence of judgment, Brainard added.
1:25 PM ET: Event concludes.
Earlier, Fed’s Mester said Wednesday more rate hikes are needed to fight red-hot inflation