Fed Vice Chair Cautious on Rate Hikes: "Must Also Consider Risks of Economic Slowdown"

Lael Brainard, Vice Chair of the United States Federal Reserve (Fed)
[Photo by AP News]

[Asia Economy Reporter Park Byung-hee] Voices urging caution on raising the benchmark interest rate are gaining strength within the U.S. central bank, the Federal Reserve (Fed). The Fed has already decided on an unprecedentedly rapid increase in the benchmark interest rate, and opinions are emerging that the potential impact on the economy must be considered.

On the 10th (local time), Lael Brainard, Vice Chair of the Fed, expressed at the National Association for Business Economics (NABE) annual meeting that a restrictive benchmark interest rate is needed for some time to curb inflation, but attention must also be paid to the risks associated with raising the rate, according to major foreign media reports on the same day. Vice Chair Brainard stated that while the Fed needs to raise the benchmark interest rate further, signs of economic slowdown due to the rate hikes have already begun, and the risks must be taken into account. He emphasized that although a restrictive monetary policy is necessary to control inflation, the pace of further rate hikes should be determined based on economic indicators. He also stressed that the Fed must examine the risks that rate hikes pose not only to the U.S. but also to the global economy.

Earlier, the United Nations requested central banks to refrain from tightening measures, warning that the global economy is on the brink of recession due to such policies. Vice Chair Brainard appeared to partially agree with the UN's stance.

Vice Chair Brainard noted that the Fed’s rate hikes have begun to slow the economy. In particular, he pointed out that simultaneous rate hikes by the Fed and other central banks have caused economic slowdowns in some areas to be more severe than expected, which is a risk that U.S. officials need to monitor. He added that the overall effects of the rate hikes may not be fully apparent for several months to come.

However, Vice Chair Brainard emphasized that a restrictive monetary policy is still clearly necessary at this time. He stated that the tightening stance will continue until there is confidence that inflation is declining, and that the Fed has indicated it will raise rates further. He added that as the Fed raises rates going forward, it will gain a better understanding of the impact on the economy, which will be reflected in upcoming economic data and U.S. and global risks, and that the Fed’s actual monetary policy decisions will be based on these indicators. He warned that prematurely easing the tightening stance is risky and that it will take more time for inflation to fall.

The market currently expects the Fed to decide on a "giant step" (a 0.75 percentage point increase in the benchmark interest rate) at the Federal Open Market Committee (FOMC) meeting on November 1-2. This would mark the fourth consecutive giant step. Vice Chair Brainard did not provide a clear stance on whether the Fed will decide on another giant step or ease the tightening stance at the November FOMC meeting.

Regarding the Fed’s dot plot forecast that the U.S. benchmark interest rate will rise to around 4.6% next year, he said it is a very helpful forecast at this point. However, he reiterated that the situation could change and that it depends on how the economic conditions evolve.

At the same event, Charles Evans, President of the Federal Reserve Bank of Chicago, expressed the view that caution is needed regarding the risks of excessive rate hikes.

President Evans said that the rapid pace of rate hikes has brought the economy quickly to a point where inflationary pressures are easing, allowing time to observe how the economic situation changes. However, Evans also supported the dot plot forecast of a 4.6% benchmark rate. He said the rate should be raised to slightly above 4.5% by March next year, then economic indicators should be monitored.

In a survey conducted by NABE of 45 economic experts, just over half of the respondents identified the Fed’s aggressive tightening measures as the biggest downside risk to the U.S. economy.