The United States is making progress towards the Fed's maximum employment and 2% inflation goals, but the depth of the remaining problem still requires the central bank not jump the gun in starting to tighten monetary policy, Fed Governor Lael Brainard said on Tuesday.
"While we are far from our goals today, we are seeing welcome progress, and I expect to see further progress," Brainard said in remarks prepared for delivery to the Economic Club of New York. But "jobs are down by between 8 and 10 million compared with the level we would have seen in the absence of the pandemic. And it will be important to see sustained progress on inflation," not just a temporary jump.
Some of the factors fueling current strong growth, including fiscal spending and the rush by households to take advantage of a broader economic reopening, are likely to fade over time, Brainard noted, another reason the Fed should not pull back too soon.
"Remaining steady in our outcomes-based approach during the transitory reopening surge will help ensure the economic momentum that will be needed," to make sure inflation hits and stays at the Fed's target, and people have as much time as possible to restart their old jobs or find new ones, she said.
The Fed is approaching a critical few months as it tries to read an economy progressing through the unparalleled moment of restarting after a pandemic. What are difficult judgments in normal times -- assessing the path of inflation or assessing what employment metrics are most meaningful -- have become even more complex in an environment where consumption and work patterns have been upended, and may have been changed permanently by the historic health crisis.
How those questions are resolved will determine when the Fed begins to reduce its $120 billion in monthly bond purchases, and then eventually raises interest rates from the current near zero level.
The Fed appears to be edging towards the start of that discussion. A key bit of information will come on Friday when new employment data will show whether hiring picked up in May after a weaker-than-expected April.
Another poor outcome won't necessarily dim faith in the recovery, only emphasize how hard it is to restart a $20 trillion economy.
Brainard has been among the stronger voices arguing to wait on any policy change to be sure the recovery won't slip, but herself made a revision in her language on Tuesday. While saying policy should remain steady, she did not repeat her call for the Fed to be "patient" before making any changes, a word often used to push policy debates far down the road.
The fact that prices are currently being driven higher by things like unexpected computer chip shortages and a rush by consumers to buy used cars is all the more reason to wait -- as is the uncertainty over why people seem hesitant to take jobs.
Some of that data "noise" will ease by the fall, Brainard said.
While she said she would be "attentive" to signs of higher inflation, she cautioned also against "preemptive tightening" that could deprive people of jobs.