The Fed: Fed’s Brainard ever so slightly takes on more dovish tone

Lael Brainard, governor of the U.S. Federal Reserve

Federal Reserve Gov. Lael Brainard said the central bank is likely to want to keep raising interest rates, but sounded just slightly more dovish than she did a few months ago in a speech on Friday.

“The gradual path of increases in the federal funds rate has served us well by giving us time to assess the effects of policy as we have proceeded. That approach remains appropriate in the near term, although the policy path increasingly will depend on how the outlook evolves,” Brainard said in a speech to the Peterson Institute for International Economics.

That’s a slight but not huge shift from her previous stance. In September, Brainard said “over the next year or two, barring unexpected developments, continued gradual increases in the federal funds rate are likely to be appropriate.”

The lack of future calendar guidance seems in line with the approach outlined in the most recent minutes. The central bank said it may be time to get rid of the phrase “further gradual increases” and put greater emphasis on the evaluation of incoming data.

Read: Key passages from the Fed minutes

The Wall Street Journal on Thursday reported the Fed was considering changing the statement at its next meeting — where expectations are for another quarter-point rate hike — to reflect a so-called wait-and-see approach.

Financial markets are pricing in one interest-rate hike in December, and just one more in 2019. While yields on government debt TMUBMUSD02Y, -1.78%  have dropped dramatically this week, stocks SPX, -1.65%   haven’t seen a boost.

Brainard more broadly sounded optimistic about the economy, noting that the three-month average of jobs growth was 170,000, “well above the pace necessary to absorb new entrants into the labor force.”

Read: U.S. gains 155,000 jobs, unemployment stays at 3.7% in plain-vanilla November labor report

Brainard also called out concerns over business debt.

She said it may be time for the central bank to impose a countercyclical counter buffer on banks, a step her colleagues on the board have resisted. Brainard said that when the Fed released its framework, the buffer was calibrated so that it would be above zero about a third of the time, when financial vulnerabilities are assessed to be in the upper one-third of their historical distribution.

“At a time when cyclical pressures have been building and bank profitability has been strong, it might be prudent to ask large banking organizations to fortify their capital buffers, which could subsequently be released if conditions warrant,” she said. She said corporate borrowing has reached new heights amid rapid growth and deteriorating underwriting standards, and mutual funds that are exposed have liquidity mismatches.

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