By Howard Schneider and Ann Saphir
CHICAGO (Reuters) – Tighter U.S. monetary policy has begun to be felt in an economy that may be slowing faster than expected, but the full brunt of Federal Reserve interest rate increases still won’t be apparent for months, Fed Vice Chair Lael Brainard said Monday.
“Output has decelerated so far this year by more than anticipated, suggesting that policy tightening is having some effect” in sectors like housing that are directly influenced by borrowing costs for home mortgages, Brainard said in comments prepared for delivery to a National Association for Business Economics conference. “In other sectors, lags in transmission mean that policy actions to date will have their full effect on activity in coming quarters, and the effect on price setting may take longer.”With foreign central banks all pulling in the same direction towards higher rates to fight inflation, she said, “the moderation in demand should be reinforced” even further.
There are indications U.S. consumers have spent down household balances faster than previously estimated, presaging a possibly subdued pace of consumer spending, she said.
“I now expect that the second-half rebound will be limited, and that real (gross domestic product) growth will be essentially flat this year,” Brainard said.
Still, the Fed vice chair gave no indication that economic weakness was at a point where it would change Fed plans to continue raising interest rates.
“Uncertainty remains high, and I am paying close attention to the evolution of the outlook as well as global risks,” that could stress financial markets Brainard said. “In this environment, a sharp decrease in risk sentiment or other risk event that may be difficult to anticipate could be amplified, especially given fragile liquidity in core financial markets.”
Still “monetary policy will be restrictive for some time to ensure that inflation moves back to target over time,” Brainard said. “In light of elevated global economic and financial uncertainty, moving forward deliberately and in a data-dependent manner will enable us to learn how economic activity, employment, and inflation are adjusting.”