Lael Brainard, Speech: Staying the Course to Bring Inflation Down

Monetary Policy Lag

“From March to December 2022, the Federal Open Market Committee (FOMC) undertook a large cumulative tightening in the stance of monetary policy by raising the policy rate 4-1/4 percentage points and shrinking the balance sheet. Although financial conditions adjust immediately to reflect expected and actual changes in monetary policy, the full adjustment of output, employment, and inflation occurs with a lag.7 Given the speed and magnitude of the swing in the stance of monetary policy, the lagged effects of earlier accommodation likely offset some of the initial effects of tightening over the course of 2022, and it is likely that the full effect on demand, employment, and inflation of the cumulative tightening that is in the pipeline still lies ahead. That said, there is uncertainty about the timing and magnitude.”

Inflation Expectations

“And the evidence from market- and survey-based measures suggests that longer-term inflation expectations are well anchored, while year-ahead measures have recently declined but remain elevated.”

Inflation

“Together, the price trends in core goods and nonhousing services, the tentative indications of some deceleration in wages, the evidence of anchored expectations, and the scope for margin compression may provide some reassurance that we are not currently experiencing a 1970s-style wage–price spiral. For these reasons, it remains possible that a continued moderation in aggregate demand could facilitate continued easing in the labor market and reduction in inflation without a significant loss of employment.”

Fed Funds

“The FOMC moved policy into restrictive territory at a rapid pace and subsequently downshifted the pace of increases in the target range at its most recent meeting. This will enable us to assess more data as we move the policy rate closer to a sufficiently restrictive level, taking into account the risks around our dual-mandate goals. In parallel, balance sheet runoff is continuing. Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2 percent on a sustained basis.”