Fed Official Lael Brainard Says Labor Market, Inflation Can Return to Pre-Pandemic Equilibrium

ARLINGTON, Va.—A top Federal Reserve official said that the economy was likely to make a complete recovery from the coronavirus and warned against prematurely concluding that the central bank needed to raise interest rates.

Fed governor

Lael Brainard,

a top contender to become chairwoman of the central bank next year, pushed back against concerns that inflation might soon accelerate because of difficulties hiring workers.

Ms. Brainard devoted most of her remarks Monday at an economics conference to explaining why she is hopeful the pandemic hasn’t altered the underlying supply of and demand for labor and why she expects a recent surge in prices to abate on its own. That analysis would argue for more patience when considering plans to accelerate potential interest rate increases.

“I expect inflation to decelerate, and pre-Covid inflation dynamics to return when Covid disruptions dissipate,” said Ms. Brainard in prepared remarks. “Once Covid constraints recede, I see no reason the labor market should not be as strong or stronger than it was pre-pandemic.”

Ms. Brainard warned that many economists and policy makers after every recent downturn have often fretted that the supply of labor may shrink in ways that promote more persistent inflationary pressures, and that those concerns have often faded as more workers seek employment once an expansion matures.

Ms. Brainard didn’t specifically endorse an evolving timetable for reducing the Fed’s $120 billion in monthly bond purchases that Fed Chairman

Jerome Powell

sketched out last week. Mr. Powell indicated the central bank was on a path to begin reducing that stimulus at its next meeting, Nov. 2-3, and to phase out the bond purchases entirely by the middle of next year.

Instead, Ms. Brainard said she believed the labor market was still “a bit short of the mark” on the Fed’s threshold for achieving “substantial further progress” in recouping a deficit of around 10 million jobs around the end of last year. “If progress continues as I hope, it may soon meet the mark,” she said.

The U.S. inflation rate reached a 13-year high recently, triggering a debate about whether the country is entering an inflationary period similar to the 1970s. WSJ’s Jon Hilsenrath looks at what consumers can expect next.

Ms. Brainard said that despite a recent surge in prices that has taken the Fed’s preferred inflation gauge above 4% this year, well above its 2% target, she said there were many reasons to expect a return to pre-pandemic price growth much closer to the Fed’s target.

Ms. Brainard said she was still more concerned about the Fed failing to meet its target in the years following the recent surge in inflation because of inflation remaining somewhat lower than 2%, as it did last decade. “While the playbook for guiding inflation back down to target following a moderate overshoot is well tested and effective, experience suggests it is difficult to guide inflation up to target from below,” said Ms. Brainard.

The Fed official also said she believed the Delta variant of the coronavirus had illustrated the risks of weaker-than-anticipated growth and consumption. Several of her colleagues have instead focused on the risks of stronger-than-anticipated inflation that results from an extension of supply-chain bottlenecks.

“Delta highlights the importance of being attentive to economic outcomes and not getting too attached to an outlook that may get buffeted by evolving virus conditions,” she said.

Write to Nick Timiraos at [email protected]

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