Dr Lael Brainard, who is a Fed governor, not a regional Fed President, and so has a permanent vote on the FOMC gave a quite informative speech yesterday which we précis below as it shows clearly the thoughts from the “dove camp” at the FOMC.
Dr Brainard has been on the committee since June 2014 and is not quoted very often. Before joining the Fed she was Undersecretary of the US Department of Treasury from 2010 to 2013 and Counsellor to the Secretary of the Treasury in 2009. From 2001 to 2008, she was Vice President and the Founding Director of the Global Economy and Development Program and held the Bernard L. Schwartz Chair at the Brookings Institution, where she built a research program to address global economic challenges.
“I view the risks to the economic outlook as tilted to the downside. The downside risks make a strong case for continuing to carefully nurture the U.S. recovery...and argue against prematurely taking away the support that has been so critical to its vitality.”
“These risks matter more than usual because the ability to provide additional accommodation if downside risks materialize is, in practice, more constrained than the ability to remove accommodation more rapidly if upside risks materialize…From the perspective of risk management, in today's circumstances, we have considerably greater latitude to adjust the path of policy in response to inflation that exceeds current forecasts than we have to provide additional accommodation in response to additional adverse shocks.”
“We should not take the continued strength of domestic demand growth for granted. Although the outlook for domestic demand is good, global forces are weighing on net exports and inflation, and the risks from abroad appear tilted to the downside.”
“Our economy has made good progress toward full employment, but sluggish wage growth suggests there is some room to go, and inflation has remained persistently below our target. With equilibrium real interest rates likely to remain low for some time and policy options that are more limited if conditions deteriorate than if they accelerate, risk-management considerations counsel a stance of waiting to see if the risks to the outlook diminish.”
“…many central banks in advanced economies have tightened policy since the financial crisis, prompted by improving domestic activity. In these cases, the tightening was reversed as the outlook evolved. Given the current uncertainty, we should put some weight on the risk of following this pattern.”
“Consider two possible scenarios. First, many observers have suggested that the economy will soon begin to strain available resources without some monetary tightening. Because monetary policy acts with a lag, in this scenario, high rates of resource utilization may lead to a large buildup of inflationary pressures, a rise in inflation expectations and persistent inflation in excess of our 2 percent target. However, we have well-tested tools to address such a situation and plenty of policy room in which to use them….Now, take the alternative risk: that the underlying momentum of the domestic economy is not strong enough to resist the deflationary pull of the international environment. A further step-down in global demand growth and a further strengthening in the dollar could increase the already sizable negative effect of the global environment on U.S. demand, pushing U.S. growth back to, or below, potential. Progress toward full employment and 2 percent inflation would stall or reverse. With limited ability to ease policy, it would be more difficult to move the economy back on track.”
Probably the clearest insight into the Fed’s concerns we have seen and really does show that “lift off” is data dependent.