In advance of Yellen speech, Brainard urges caution on rates

WASHINGTON – In a possible preview of a speech Federal Reserve Chair Janet Yellen will give Monday, a close ally said Friday that the Fed should be in no hurry to raise interest rates, especially after a bleak U.S. jobs report.

The official, Lael Brainard, a Fed board member, said recent economic developments have muddied the picture of the U.S. economy. And she pointed to additional risks, including possible market turmoil if Britain votes later this month to leave the European Union.

“Recent economic developments have been mixed, and important downside risks remain,” Brainard said in a speech to the Council of Foreign Relations in Washington.

“There is a benefit to waiting for additional data to provide confidence that domestic activity has rebounded strongly and reassurance that near-term international events will not derail progress toward our goals,” she said.

Brainard argued for a delay in what would be the Fed’s second rate hike after an initial increase in December. She suggested that the risk of raising rates too soon and depressing growth were higher than the risk of waiting longer.

Given that Brainard and Yellen are allies on the Fed board, Brainard’s remarks could turn out to be a preview of the speech Yellen will deliver Monday in Philadelphia. The Fed chair is scheduled to discuss the state of the economy and the outlook for Fed rates.

Speaking at Harvard a week ago, Yellen had said she thought a rate hike would be appropriate in coming months — if the economy kept improving. She said in response to a question that she expected the Fed to gradually raise its key rate, “and probably in the coming months, such a move would be appropriate.”

But Yellen did not specify a date for a Fed move. The Fed’s next three meetings will occur June 14-15, July 26-27 and September 20-21.

Investors’ expectations for a June move dropped sharply Friday after the government said U.S. employers added just 38,000 jobs in May, the fewest in more than five years.

In her speech, Brainard took note of the weak jobs report, saying it suggested that the labour market has slowed and was among a string of mixed readings on the economy.

Brainard also observed that growth remains low in broad measures of pay. And she said that inflation — excluding the volatile categories of food and energy — has yet to “convincingly exceed the low levels that have prevailed over much of the recovery.”

The Fed has linked further rate hikes to higher confidence that inflation is moving toward its long-term 2 per cent target. The Fed’s preferred inflation gauge has remained below that target for the past four years.

In December, the Fed raised its benchmark rate by a quarter-point, the first change after seven years of leaving the rate at a record low near zero. The central bank has left rates unchanged so far this year.