WASHINGTON – Lael Brainard pledged in written remarks Wednesday to help the Federal Reserve fight a spike in inflation while still supporting the economic recovery — a tricky balancing act she would face if confirmed as the Fed's No. 2 official.
Brainard, a member of the central bank's Board of Governors, was nominated for the vice chair post in late November by President Joe Biden, the same day that Biden nominated Jerome Powell for a second four-year term as chair. As a Fed governor since 2014, Brainard has voted on the central bank's interest-rate decisions at its eight policymaking meetings each year as well as on its financial regulatory policies.
“Our monetary policy is focused on getting inflation back down to 2% while sustaining a recovery that includes everyone,” Brainard said in remarks prepared for delivery Thursday to the Senate Banking Committee, which is expected to back her nomination in the coming weeks before the full Senate confirms it. “This is our most important task.”
Brainard's elevation of inflation-fighting as the Fed's top goal is notable given that she is, for now, the lone Democrat on the Fed's board and is seen as more inclined to keeping interest rates low to boost employment than many other Fed officials are. Biden is expected soon to nominate three more people to fill vacancies on the board.
On Wednesday, the government reported that inflation spiked to 7% in December from a year earlier, the sharpest such increase in four decades. Brainard will face questioning from senators about how the Fed will rein in rising prices, as Powell did at his own Senate confirmation hearing Tuesday. The Fed is tasked by Congress with keeping prices stable and fostering "maximum employment."
In his testimony, Powell pledged that the Fed would accelerate its planned interest rate hikes, if needed, to curb high inflation. The Fed has held its benchmark short-term rate near zero since March 2020, when the pandemic plunged the economy into a deep recession. Fed officials have predicted that they will raise rates three times this year, while many economists envision four hikes. The rate increases, which, in turn, raise borrowing costs for many consumer and business loans, are intended to cool the economy, slow hiring and reduce inflation.
Powell's — and Brainard's — challenge this year is to strike the right balance between fighting inflation and supporting the economy. If the Fed raises rates too slowly, inflation may accelerate further and force it to take more draconian steps later to rein it in, potentially causing a recession. Yet if the Fed raise rates too quickly, it could trigger that recession earlier and perhaps unnecessarily.
In his testimony Tuesday, Powell sought to link the Fed's two mandates of low inflation and maximum employment. He said that high inflation, if it becomes “entrenched,” could force the Fed to tighten credit act so aggressively that employers cut jobs.
"Achievement of maximum employment, by which we really mean continued progress in hiring and participation, is going to require price stability,” Powell said.
In the jockeying that occurred among Democrats before Biden chose Powell for a second term as Fed chair, Brainard was the preferred alternative to Powell among many progressives. One reason is that she has supported tougher financial regulations than Powell has. In the past four years, she cast 20 dissenting votes against financial rule changes. In March 2020, for example, Brainard opposed a regulatory change that she said would reduce the amount of reserves large banks were required to hold to guard against losses.
She has also spoken more forcefully than Powell on ways that the Fed can confront global warming.
Many environmental groups say that loans to oil and gas companies, as well as to commercial real estate developers, could default and cause large losses at banks, should environmental damage worsen.
“Climate change,” Brainard has said, “is projected to have profound effects on the economy and the financial system, and it is already inflicting damage.”