One of the US Federal Reserve’s biggest skeptics about the strength of the global expansion signaled the US economy might be strong enough to withstand an interest-rate increase soon, as key policymakers coalesce around tightening at their next meeting in the middle of this month.
“Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path,” Fed Governor Lael Brainard said in the text of a speech on Wednesday at Harvard University in Cambridge, Massachusetts. “We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing and risks to the outlook are as close to balanced as they have been in some time.”
Brainard, who for months has played the role of lead dove at the Fed by arguing to keep rates lower for longer, said the US economy “appears to be in transition.”
If continued, that would allow the central bank not only to normalize rates gradually, but also begin considering when and how to reduce the size of its US$4.5 trillion balance sheet, she said.
Her improved outlook might add momentum to rising expectations among investors that the Fed would raise rates by a quarter percentage point when the Federal Open Market Committee gathers in Washington on March 14 and March 15.
Hawkish comments from New York Fed President William Dudley and San Francisco’s John Williams on Tuesday already significantly boosted those expectations.
Brainard said she expects the US economy to continue making progress toward the Fed’s goals, driven by growth in consumption, adding that signs of improved business investment are rising.
“The contrast with the situation a year ago is sharp,” she said.
A former undersecretary of the Treasury for international affairs, Brainard also cited favorable developments in a number of major foreign economies.
“Near-term risks to the United States from abroad appear to have diminished,” she said. “Recoveries are gaining traction in China, Europe and Japan, in part reflecting greater confidence in their respective policy environments.”
However, Brainard added that perils remain for the Fed in navigating interest rates out of historically low territory.
Chief among those was the persisting proximity of rates to zero and the likelihood that rates would return there if the economy suffered a negative shock.
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