Financial conditions supportive, but ‘downside risks’ could weigh on economic activity, Fed governor reports

Despite recent volatility, financial conditions across the country overall remain supportive, although “downside risks” could weigh on economic activity, a member of the Federal Reserve Board said Friday.

“My own assessment is that the most likely path for the economy remains solid,” Federal Reserve Board Gov. Lael Brainard told an audience Friday. She was speaking before a “Fed Listens” event – designed by the Fed to gather input from the public about its activities – sponsored by the Federal Reserve Bank of Cleveland. The event was held in Cincinnati.

“The latest data suggest that consumer spending is robust, and consumer confidence is high,” Brainard said. “Although the pace of payroll gains has moderated recently, unemployment is at a 50-year low, wages are growing, participation in the labor force has expanded, and unemployment insurance claims are at cycle lows. Despite recent volatility, financial conditions overall remain supportive.”

She did, however, outline several “downside risks.” “Crosscurrents from policy uncertainty have risen since early May, crimping business investment plans, raising concerns in some financial market segments, and weighing on global growth prospects,” she said. She added that foreign authorities are seeking additional policy space to address growth and inflation shortfalls. She said recent indicators of inflation and inflation expectations have also been disappointing, making it all the more important to sustain the economy’s momentum.

“The downside risks, if they materialize, could weigh on economic activity,” she said. “Basic principles of risk management in a low neutral rate environment with compressed conventional policy space would argue for softening the expected path of policy when risks shift to the downside.”

Regarding the “listening” portion of the program, Brainard said she wanted to gather information on a variety of topics, including local economic activity, job availability, training, hiring, price inflation, and wage growth. “What about the availability and cost of credit – whether to start or expand a small business, buy a car to get to work, or invest in owning a home or getting a degree? And are there ways we can better communicate with you? I look forward to hearing your views on these and other questions,” she said.

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