Fed’s Brainard: Fed has less space to address recession in low interest rate environment

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In a recently delivered speech titled ‘The Disconnect between Inflation and Employment in the New Normal’, Fed Governor Lael Brainard argued that the new economic environment was characterized by low sensitivity of inflation to changes in labour market slack, a low long-term neutral rate of interest, and low underlying trend inflation.

Key quotes

“In today’s new normal, it is important to achieve inflation and inflation expectations around our 2% target on a sustained basis.”

“We want to be mindful of the risk of financial imbalances that could amplify any shock and help tip the economy into recession, which the Federal Reserve has less conventional space to address in today’s low interest rate environment.”

“In my view, it is therefore wise to proceed cautiously, helping to sustain the expansion and further gains in employment and with appropriate regulatory safeguards that reduce the risk of dangerous financial imbalances.”

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