Federal Reserve governor Lael Brainard said Thursday the central bank can allow inflation to overshoot its target slightly under a “new normal” for the US economy, reinforcing expectations that officials will keep interest rates low.
Prices have become less sensitive to a tight labour market, and underlying trend inflation, which strips out idiosyncratic and transitory factors, “appears to be somewhat below” the Fed’s 2 per cent goal, Ms Brainard said in a speech at a National Tax Association event in Washington.
She added that the Fed can achieve its goal of sustaining 2 per cent inflation by aiming for a level of price growth “slightly above” its target “for a couple of years”.
The Fed has paused its run of rate rises after four increases in 2018, with officials saying they will be patient in making policy moves amid sluggish inflation and uncertainty in the global economic outlook. Earlier this month, Fed chair Jay Powell said he did not see a strong case to move the central bank’s target rate in either direction. The Fed has pencilled in no increases to the federal funds rate this year, while investors are betting on a rate cut.
Recent data showing muted inflation have further stoked the market’s view that officials will slash rates this year. The core personal consumption expenditures index, the Fed’s preferred inflation measure, rose 1.6 per cent year-over-year in March, down from 2 per cent in December.
Ms Brainard, a member of the Fed’s board of governors and the policy-setting Federal Open Market Committee, did not discuss the possibility of a rate cut to lift inflation but said the long-run neutral rate “seems to be lower than it was historically”. The neutral rate is a term used to describe a level of the federal funds rate that neither boosts nor inhibits economic growth.