Federal Reserve Governor Lael Brainard said Tuesday the central bank should "spin around" to provide more support for US economic growth in the coming months, after a series of unprecedented numbers earlier this year when the coronavirus epidemic broke out Programs had been introduced.
Brainard suggested that a more aggressive approach would be needed to help Americans get back to work, lower high unemployment rates, and bring inflation closer to the central bank's goal.
With interest rates already at record lows, the Fed would likely achieve this goal by buying more assets such as US Treasuries or privately held bonds.
Such a strategy has driven more investors into stocks, according to analysts, and contributed to a strong recovery in the US stock market. The S&P 500 Index
has set new records and the Dow Jones Industrial Average, for example
is not far from an all-time high.
The Fed has already stepped up asset purchases to stabilize financial markets and lower long-term interest rates. The lowest mortgage rates today have resulted in a rapid surge in home sales, even as the coronavirus continues to weigh on large parts of the economy. Auto sales also boomed.
However, Brainard also warned that low interest rates resulting from the Fed's loose anti-inflationary strategy could tempt investors to take more risk in search of returns and destabilize asset prices once the economy expands again. The Fed must be vigilant and use all of its tools to prevent asset volatility from affecting a recovery.
In a remark to the Brookings Institution, Brainard, the youngest Fed official, spoke out loudly in favor of the central bank's historic shift towards inflation averaging. The Fed broke with a decade-long tradition last week to adopt an inflation averaging strategy that could keep interest rates low for extended periods of time.
The bank would aim for an average inflation rate of 2% over an indefinite period instead of a hard target of 2% before raising interest rates.
Senior Fed officials, including Chairman Jerome Powell and Vice Chairman Richard Clarida, went into effect last week to argue for the change.
Read: According to the Fed's Clarida, the new strategy to fight inflation has its roots in the failure of the old approach
Brainard said the new strategy will help support an economic recovery from the coronavirus pandemic and boost recruitment in the long term, especially for less skilled Americans on the edge of the job market.
Echoing their peers' comments, Brainard said the Fed may have been wrong in raising interest rates as much as it did from 2015 to 2018.
The central bank raised its short-term key interest rate for benchmark Fed funds from near zero, which had prevailed for a long time after the great 2007-09 recession, to up to 2.5%. The cost of many business and consumer loans are tied to the Fed Funds rate.
Though millions of Americans still found jobs, Brainard suggested that if the Fed's new inflation averaging strategy had been introduced several years ago, the hiring would have "been bigger".
See:MarketWatch Coronavirus Recovery Tracker
Brainard said the Fed's old approach to measuring inflation and deciding when to raise interest rates has become less effective because of the big changes in the US and the global economy that have taken place during a period of low inflation.
The Fed raised interest rates as the unemployment rate fell, but the long-standing relationship known to economists as the Phillips Curve began to crumble more than a decade ago. Even when unemployment fell to record lows, inflation barely rose.
For most of the past decade, inflation has consistently fallen below the Fed's 2% target, increasing the risk of an even more damaging spike of deflation. The last time the US had a major attack of deflation was in the early stages of the Great Depression almost a century earlier.
The new strategy, according to Brainard, could "stop any downward movement in inflation expectations".