A speech by a Federal Reserve governor Tuesday underscored a basic shift in Fed policy: The central bank now needs to be convinced that quarterly rate increases are a bad idea.
After years in which any sign of economic weakness was reason enough for the Fed to maintain its stimulus campaign, the Fed is now willing to shrug off at least a little bad data. Lael Brainard, a Federal Reserve governor, told the New York Association for Business Economics that the Fed should raise its benchmark interest rate “soon,” despite new evidence that inflation remains below the level the Fed desires.
The comments by Ms. Brainard reinforced expectations that the Fed will raise rates in mid-June at its next meeting, particularly because she has been a consistent advocate of caution. If she is ready to raise rates, there is probably little internal opposition.
“On balance, when assessing economic activity and its likely evolution, it would be reasonable to conclude that further removal of accommodation will likely be appropriate soon,” Ms. Brainard said.
But beyond June, Ms. Brainard added, she might reconsider the wisdom of additional rate increases if there is not evidence of stronger inflation. Fed officials have said they would like to raise rates at least once more in the second half of the year.
The Commerce Department reported Tuesday morning that the Fed’s preferred measure of inflation rose just 1.5 percent over the 12 months ending in April, well below the 2 percent annual pace that the Fed regards as economically optimal. The annual pace of inflation, moreover, has fallen in each of the past three months.
“If the soft inflation data persist, that would be concerning and, ultimately, could lead me to reassess the appropriate path of policy,” Ms. Brainard said in New York.
The Fed raised its benchmark rate in December and again in March, to the current range of 0.75 percent to 1 percent. The chances of another quarter-point increase in June stood at roughly 89 percent at the close of futures trading in Chicago on Tuesday, according to CME Group.
The Fed has kept rates at low levels since the financial crisis to stimulate economic activity by encouraging borrowing and risk-taking. It is gradually raising rates toward historically normal levels as the economy improves. Fed officials have said they hope to return rates to a neutral level by the end of the year.
“My view still is that three rate hikes this year makes sense,” John Williams, the president of the Federal Reserve Bank of San Francisco, told Bloomberg News in Singapore on Monday. “Nothing has pushed me away from that. We should continue this gradual process of policy normalization in interest rates.”
Ms. Brainard on Tuesday also offered an upbeat assessment of the economy. She said it appeared to be rebounding from a weak first quarter, with data showing that consumer spending had strengthened in line with the Fed’s expectations. She noted the continued decline of the unemployment rate, which fell to 4.4 percent in April. The government will publish the May jobs report on Friday.
Ms. Brainard, who has carved out a reputation as the Fed official who takes the most active interest in the health of the global economy, also noted that the international outlook has brightened. “For the first time in many years, we are seeing signs of synchronized economic expansions at home and abroad,” she said.
Inflation remains the outstanding problem. The Fed aims to maintain moderate inflation, rather than price stability, because that lets the Fed cut interest rates more sharply during an economic downturn.
Inflation also eases downward economic adjustments. Employers, for example, can cut costs by raising wages more slowly than inflation, which may be easier for workers to accept than an outright pay cut.
The Fed also wants to avoid deflation, or price declines, because as things become cheaper each day, consumers and businesses postpone buying and economic activity shrinks more. Measures of inflation are imperfect, and prudence dictates maintaining some distance from zero.
Analysts attribute some of the recent dip in inflation to a price war among providers of cellular service. But forecasters are now predicting that inflation may not reach 2 percent until next year, setting up 2017 as the latest in a long series of years that inflation was predicted to rebound and then failed to meet expectations.
Ms. Brainard described this persistent sluggishness as something of a mystery, particularly given the Fed’s view that the labor market is back to normal.
“The puzzle today is why inflation appears to be slowing at a time when most forecasters place the economy at or near full employment,” she said.
She described the weakness as a “source of concern,” but given the overall strength of the economy, she said, it was not reason enough to delay a rate increase.