Fed’s Brainard: There’s a risk of raising rates too much

At some point, the Federal Reserve will face the risk of raising rates too much, a top official said Wednesday, while asserting the central bank will remain resolute in its drive to bring inflation down.

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

“At some point in the tightening cycle, the risks will become more two-sided,” Brainard said, according to the prepared text of a speech before a banking group in New York. The rapidity of rate increases and uncertainty about the pace of their economic effects “create risks associated with overtightening,” she continued.

• But Brainard also warned that history teaches “it is important to avoid the risk of pulling back too soon” and said that, when it comes to inflation, “our resolve is firm, our goals are clear, and our tools are up to the task.”

The big picture: Brainard appears to be firmly on board with the Fed’s push to raise interest rates aggressively to clamp down inflation, but was more willing than Powell was in his most recent communications to acknowledge that there are risks of raising rates too high in addition to those of not raising them high enough.

Brainard also addressed ways inflation could come down, and said “a reduction in currently elevated margins could make an important contribution to reduced inflation pressures in consumer goods.”

• She notes, for example, that the price consumers pay for cars and trucks has risen much faster in the last year than the price dealers pay wholesale.
• She states that “overall retail margins … have risen significantly more than the average hourly wage that retailers pay workers to stock shelves and serve customers over the past year, suggesting that there may also be scope for reductions in retail margins.”

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

• While not fully embracing that narrative, Brainard is acknowledging evidence that the unusual circumstances of the pandemic have allowed companies to raise prices in ways that are out-of-whack with their own costs.