Lael Brainard, Speech: Bringing Inflation Down

“As we follow through on our plan to move monetary policy to an appropriately restrictive stance, the effect of the increased policy rate and pace of balance sheet shrinkage should put downward pressure on aggregate demand, particularly in interest-sensitive sectors like housing. Continued improvements in supply conditions and a further rotation of consumption away from goods and into services should also help by reducing price pressures in goods. With regard to non-housing services, the magnitude of price pressure over the next several quarters will depend on an overall slowing in spending as well as the extent to which labor supply improves in these sectors.”

“At some point in the tightening cycle, the risks will become more two-sided. The rapidity of the tightening cycle and its global nature, as well as the uncertainty around the pace at which the effects of tighter financial conditions are working their way through aggregate demand, create risks associated with overtightening. And if history is any guide, it is important to avoid the risk of pulling back too soon. Following a lengthy sequence of adverse supply shocks to goods, labor, and commodities that, in combination with strong demand, drove inflation to multidecade highs, we must maintain a risk-management posture to defend the inflation expectations anchor.9 While we have no control over the supply shocks to food, energy, labor, or semiconductors, we have both the capacity and the responsibility to maintain anchored inflation expectations and price stability.”

“We are in this for as long as it takes to get inflation down. So far, we have expeditiously raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further. As of this month, the maximum monthly reduction in the balance sheet will be nearly double the level of the previous cycle.10 Together, the increase in the policy rate and the reduction in the balance sheet should help bring demand into alignment with supply. Monetary policy will need to be restrictive for some time to provide confidence that inflation is moving down to target.”