Barring unexpected developments, continued gradual increases in the federal funds rate are likely to be appropriate to sustain full employment and inflation near its objective, Federal Reserve Board Gov. Lael Brainard stated in her written remarks for a speech Wednesday before the Detroit Economic Club in Detroit, Mich.
“With government stimulus in the pipeline providing tailwinds to demand over the next two years, it appears reasonable to expect the shorter-run neutral rate to rise somewhat higher than the longer-run neutral rate,” she stated. “Further out, the policy path will depend on how the economy evolves.”
Brainard said there’s a growing prospect that the federal funds rate set by the Federal Open Market Committee (FOMC) “at some point … “will exceed current estimates of the longer-run federal funds rate.” This is anticipated in the median projection in the FOMC’s Summary of Economic Projections (in June).
The Fed governor, noting the uncertainties related to fiscal policy, foreign and trade risks and financial system vulnerabilities, said the gradual pace of rate hikes implicit in the SEP’s median policy path “incorporates a degree of caution, which is appropriate, in my view.”
Speech: What Do We Mean by Neutral and What Role Does It Play in Monetary Policy? – by Lael Brainard before the Detroit Economic Club Sept. 12, 2018