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The Fed: Fed’s Brainard suggests a boom economy is not a sure thing

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The U.S. economy is reopening and the recovery is gathering momentum but there remains a lot of uncertainty and the U.S. central bank should be patient with its easy policy stance, said Fed Governor Lael Brainard on Tuesday.

“The outlook is bright, but risks remain, and we are far from our goals,” Brainard said, in remarks prepared for a talk with the Society for Advancing Business Editing and Writing.

Many economists talk about a coming “boom” for the economy, with GDP growth above 10% in coming quarters.

But Brainard threw some cold water on the celebration, saying that the weaker-than-expected April job report was a reminder that “the path of reopening and recovery is likely to be uneven and difficult to predict.”

“Basing monetary policy on outcomes rather than the outlook will serve us well,” Brainard added.

Many economists think that the personal savings rate of 21% in the wake of stimulus checks will fuel a burst of spending in coming months. But Brainard suggested this wasn’t so clear cut.

She noted that the strength in domestic demand hinges in part on how concentrated savings is among wealthy households, who have less need to spend less overall and who may be exhausted from buying so many goods during the pandemic.

Another uncertainty is how much of the strong domestic demand will leak abroad as Americans stock up on imported goods, she noted.

Brainard also noted that the strong fiscal support is pushing the economy this year but the absence of more government aid will cause relatively slower growth next year.

“The boost to spending from pent up demand this year as the economy reopens is also unlikely to be repeated next year,” she said.

Brainard said the outlook for inflation is difficult to predict but said she saw a variety of reasons to suggest any rise associated with reopening the economy will be “largely transitory.”

“A persistent material increase in inflation would require not just that wages and prices increase for a period after reopening, but also a broad expectations that they will continue to increase at a persistently higher pace,” she said.

Past experience suggests that businesses will try to compete against rivals by keeping prices low by compressing margins and relying on automation to reduce costs, she noted.

The Fed should also remember that it has had a tough time anchoring inflation expectations at 2%, she added.

U.S. stocks
SPX,
-1.05%

COMP,
-0.42%

were off their intra-day lows but remained weak in mid-day trading. The Dow Jones Industrial Average
DJIA,
-1.50%

was down 450 points.

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