US interest rates will remain high for some time

Washington: Federal Reserve Vice Chairman Lyle Brainard said Thursday that US interest rates will need to remain high for some time even as inflation drops, adding that the central bank plans to “stay course” in combating higher rates.

Inflation has fallen from a 40-year high as the Federal Reserve raised interest rates sharply over the past year to cool the world’s largest economy, and officials have warned against easing policy prematurely.

“Even with the recent moderation, inflation remains high, and policy will need to be sufficiently restrained for some time,” Brainard said in prepared remarks for an event in Chicago.

She said this was to ensure that inflation would return to 2% on a sustainable basis.

Last year, the Fed quickly raised the benchmark lending rate from about zero to 4.25-4.50 percent. Brainard’s recent comments suggest that rates should remain high for some time.

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In a separate event on Thursday, New York Federal Reserve Bank President John Williams echoed Brainard’s sentiments about inflation remaining too high and added that cutting rates would likely require “a period of sub-trend growth and some softening in labor market conditions.”

While the Fed has taken strong action, he said, “it’s clear that monetary policy still has more work to do,” noting that policy also affects parts of the economy differently.

With the impact of policies spreading across sectors, he expects “modest” GDP growth of around 1% in 2023, along with a rise in the unemployment rate to around 4.5%.

Aware of the late transition from the Fed’s aggressive campaign, Brainard warned of “an even greater burden on US growth and employment” this year.

“It is likely that the full impact on demand, employment and inflation of the cumulative tightening that is in the pipeline remains to be seen,” she said.

But for now, there is evidence that some persistent component of inflation is declining, along with signs of a slowdown in wages.

She said wages did not appear to be driving inflation upwards in a “1970s-style” spiral.

Brainard added that the evidence points to the possibility that continued moderation in demand may allow the labor market to contract further and inflation to decline without “a significant loss of jobs.”

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