Federal Reserve Governor Lael Brainard, one of the central bank’s most ardent doves, sounded optimistic about the U.S. economy’s outlook and suggested the pace of monetary policy tightening may need to accelerate.
“The macro environment today is the mirror image of the environment we confronted a couple of years ago,” Brainard told the Money Marketeers of New York University Tuesday. “In the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy. Today, with headwinds shifting to tailwinds, the reverse could hold true.”
Brainard’s optimistic remarks reveal a meaningful shift in her outlook for the U.S. economy. Since joining the Fed in 2014, she’s been a leading voice at the central bank for holding back on rate hikes, arguing slow growth abroad and weak inflation at home, called for caution. Her comments followed upbeat congressional testimony last week from Fed Chairman Jerome Powell, which prompted investors to lift the odds of four Fed rate hikes this year from the three moves it projected in December.
“Many of the forces that acted as headwinds to U.S. growth and weighed on policy in previous years are generating tailwinds currently,” she said, citing a pickup in economic activity outside the U.S. and fiscal stimulus from tax cuts and higher spending and closely echoing one of Powell’s key observations to lawmakers.
“The most notable tailwind is the shift in America’s fiscal policy stance from restraint to substantial stimulus in an economy close to full employment,” she said.
Citing estimates, Brainard said tax cuts would add as much as 0.5 percentage point to growth in the U.S. this year and next. Still, she noted that inflation remained subdued.
“Continued gradual increases in the federal funds rate are likely to remain appropriate to ensure inflation rises sustainably to our target and to sustain full employment,” she said.
She declined to say if she’d shifted her outlook to four rate hikes this year, when asked about this by a member of the audience following her speech. Asked whether the possibility of a trade war — a concern as President Donald Trump plans tariffs on steel and aluminum and other countries consider retaliation — could disrupt her outlook, she said it’s too soon to tell.
“We would take into account developments if they proved to be material to the outlook,” Brainard said. “It’s early to tell what the broader implications could be, so I see it as an uncertainty, but not something that would materially change my outlook, today.”
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