Lael Brainard, the vice chair of the Federal Reserve, on Monday gave a speech laying out the reasons that inflation might soon moderate while also reiterating the central bank’s plan to continue constraining the economy by raising interest rates until price increases are substantially slower.
“Monetary policy will be restrictive for some time to ensure that inflation moves back to target over time,” Ms. Brainard said.
The Fed has raised interest rates five times this year as it tries to beat back the fastest inflation in four decades, and it has been joined by its counterparts around the world in tightening policy. As so many nations raise rates so quickly, economists have warned of a higher risk of a global recession and markets have become more vulnerable to turmoil.
“The combined effect of concurrent global tightening is larger than the sum of its parts,” Ms. Brainard said on Monday, according to a prepared text, explaining that the Fed takes so-called spillover effects into account when setting rates.
“We are also very aware that the cross-border effects of unexpected movements in interest rates and exchange rates, as well as worsening external imbalances, in some cases could interact with financial vulnerabilities,” she noted.
If investors were to get spooked, she said, “fragile liquidity in core financial markets” could help amplify the fallout, Ms. Brainard said. Just last month the Bank of England had to intervene in the British government bond market to stem financial upheaval.
Ms. Brainard said that the Fed was in close contact with central banks around the world, and that many global monetary authorities were united in their fight against inflation — but trying to be transparent with one another as they set policy. The Fed, she said, also has regular interactions with global financial stability officials.
“We are very aware that we operate in a global economy,” Ms. Brainard said during a question-and-answer session after the speech. “We recognize very much that financial conditions in the U.S. transmit abroad.”
But even as she listed risks to the growth outlook emanating from abroad and at home, the Fed vice chair also emphasized the importance of wrangling inflation quickly.
“We’re aware that there are different kinds of risks in a tightening cycle,” she said. “There’s a really important risk that inflation expectations could start to flip, and that would make the task of bringing inflation down much” more difficult.
While Ms. Brainard said that “at some point, risks could become more two-sided,” she sounded focused on inflation for now.
“It will take some time for the cumulative tightening to transmit throughout the economy and to bring inflation down,” she said during her remarks.
