US Fed official says getting inflation down is ‘of paramount importance’

US Federal Reserve Governor Lael Brainard has said it is “of paramount importance” to get inflation down, noting that the central bank is “prepared to take stronger action” if inflation indicators show such action is warranted.

“Currently, inflation is much too high and is subject to upside risks,” Brainard, US President Joe Biden’s nominee to serve as the central bank’s Vice Chair, said on Tuesday in prepared remarks at a virtual event held by the Federal Reserve Bank of Minneapolis.

“All Americans are confronting higher prices, but the burden is particularly great for households with more limited resources,” she said, adding that lower-income households “disproportionately” feel the burden of high inflation, Xinhua news agency reported.

Lower-income families expend a greater share of their income on necessities, have smaller financial cushions and may have less ability to switch to lower-priced alternatives, she said.

US personal consumption expenditures (PCE), the Fed’s preferred inflation measure, surged 6.4 per cent in February 2021, the Commerce Department reported last week. The index is well above the Federal Reserve’s 2 per cent target on inflation.

The core PCE, which excludes the volatile food and energy prices, was up 5.4 per cent in February from the same period in 2021, marking the biggest jump in nearly four decades.

Despite downside risks posed by geopolitical events, including the Russia-Ukraine conflict, the US economy entered this period of uncertainty “with considerable momentum in demand and a strong labour market,” Brainard added.

As of the March labour report, payroll employment has increased at a pace of 600,000 jobs per month over the past six months, and the unemployment rate has fallen by a percentage point, she said. Latest data from the Labor Department showed that the unemployment rate in March dropped by 0.2 percentage point to 3.6 per cent, just slightly above the pre-pandemic level of 3.5 per cent.

Noting that the recovery in labor force participation was “lagging far behind” until recently, the Fed official said the pandemic constraints on labor supply are diminishing for the prime-age workforce. The labor force participation rate was at 62.4 per cent in March, still one percentage point below the pre-pandemic level of 63.4 per cent.

“An increase in labor supply associated with diminishing pandemic constraints combined with a moderation in demand associated with tightening financial conditions, slowing foreign growth, and a large decrease in fiscal support could be expected to reduce (labor market) imbalances later in the year,” Brainard added.

The Federal Open Market Committee, the Fed’s policy-making body, will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as its May meeting, she said.

Given that the recovery has been considerably stronger and faster than in the previous cycle, Brainard added that she expected the balance sheet to shrink considerably more rapidly than in the previous recovery.

At its March policy meeting, the Fed raised its benchmark interest rate by a quarter percentage point to a range of 0.2 to 0.5 per cent from near zero, marking its first rate hike since 2018 and a major step in exiting from the ultra-loose monetary policy enacted at the start of the pandemic.

Several Fed officials, including Fed Chairman Jerome Powell, have recently signaled their willingness to support a 0.5-percentage point rate hike at the central bank’s May policy meeting, instead of a traditional quarter-point increase.

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