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Fed’s Brainard: There is a threat of raising rates an excessive amount of

At some time, the Federal Reserve will face the chance of raising rates an excessive amount of, a high official said Wednesday, while asserting the central bank will stay resolute in its drive to create inflation down.

Driving the news headlines: Lael Brainard, the No. 2 official at the central bank, acknowledged risks that the Fed could overdo it on interest increases, a sentiment notably missing from Chair Jerome Powell’s hawkish speech in Jackson Hole, Wyoming, in late August.

“At some time in the tightening cycle, the risks can be more two-sided,” Brainard said, based on the prepared text of a speech before a banking group in NY. The rapidity of rate increases and uncertainty concerning the pace of these economic effects “create risks connected with overtightening,” she continued.

  • But Brainard also warned that history teaches “it is very important avoid the threat of pulling back too early” and said that, with regards to inflation, “our resolve is firm, our goals are obvious, and our tools are around the duty.”

The picture as a whole: Brainard is apparently firmly up to speed with the Fed’s push to improve interest levels aggressively to clamp down inflation, but was more willing than Powell was in his latest communications to acknowledge there are risks of raising rates too much along with those of not raising them high enough.

Brainard also addressed ways inflation could drop, and said “a decrease in currently elevated margins will make a significant contribution to reduced inflation pressures in consumer goods.”

  • She notes, for instance, that the purchase price consumers purchase vehicles has risen considerably faster within the last year compared to the price dealers pay wholesale.
  • She states that “overall retail margins have risen more than the common hourly wage that retailers pay workers to stock shelves and serve customers in the last year, suggesting that there can also be scope for reductions in retail margins.”

Between your lines: Sen. Elizabeth Warren among others on the left have accused businesses of causing high inflation by profiteering.

  • Without fully embracing that narrative, Brainard is acknowledging evidence that the unusual circumstances of the pandemic have allowed companies to improve prices with techniques which are out-of-whack making use of their own costs.

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