Fed's Brainard warns against premature rate cuts in face of high inflation

© Reuters. Federal Reserve Board Governor Lael Brainard testifies before a Senate Banking Committee hearing on her nomination to be vice-chair of the Federal Reserve, on Capitol Hill in Washington, U.S., January 13, 2022. REUTERS/Elizabeth Frantz

By Michael S. Derby

NEW YORK (Reuters) - Federal Reserve Vice Chair Lael Brainard said on Friday the U.S. central bank will need to maintain higher interest rates for some time as part of its effort to lower high levels of inflation and must guard against lowering rates prematurely.

"Monetary policy is focused on restoring price stability in a high-inflation environment," Brainard said in prepared remarks for a speech to a conference in New York that took stock of how financial stability is being affected globally by the effort to combat inflation.

"It will take time for the full effect of tighter financial conditions" caused by rate rises to work its way through the economy and lower price pressures, Brainard said. As that happens, "monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target. For these reasons, we are committed to avoiding pulling back prematurely."

The Fed's second-in-command noted it's far too soon to declare victory over price pressures. "Inflation is very high in the United States and abroad, and the risk of additional inflationary shocks cannot be ruled out," she said.

Brainard spoke in the wake of last week's Fed policy meeting. At that meeting, policymakers raised their overnight target rate by three-quarters of a percentage point to a range of between 3.00% and 3.25%, as part of their aggressive campaign to lower the highest levels of inflation seen in the United States in 40 years. Officials also penciled in more rate rises spilling into next year.

Brainard noted the destination point of Fed rate hikes is not clear at this time.

"Uncertainty is currently high, and there are a range of estimates around the appropriate destination of the target range for the cycle," Brainard said. The Fed will have to feel its way forward and see how its rate rises work through the economy, and will act "deliberately and in a data-dependent manner" with future policy actions.

Brainard said in her prepared remarks that the Fed is closely watching how its policy actions affect the global economy and financial system. Financial markets across the world have been facing high levels of volatility and the dollar's value against key currencies has surged, fueling concern that the Fed's domestic mission could cause major problems elsewhere.

"We are attentive to financial vulnerabilities that could be exacerbated by the advent of additional adverse shocks," Brainard said. She laid out areas where parts of the world could run into trouble, but did not say that any particular problems appeared imminent or of a magnitude that would change the Fed's current monetary policy path.