[PALO ALTO] The Federal Reserve should go slow in raising rates, a top US central banker said on Tuesday, adding that there may be limits to the Fed's ability to tighten monetary policy while other central banks keep it loose.
With the so-called neutral interest rate in the United States now near zero and equilibrium rates in other countries around the world also lower than in the past, the Fed has less room to stimulate the economy when needed, Fed Governor Lael Brainard said in remarks prepared for delivery at Stanford University. "The new normal is likely to be characterised by a lower level of interest rates than in the decades preceding the crisis, which counsels a cautious and gradual approach to adjusting monetary policy," she said.
Indeed, weak growth abroad has pushed up the value of the US dollar, lowering the neutral rate in the United States and pushing down on domestic job creation, she said. One model in common use at the Fed suggests a 1-per centage-point cut in rates would be required over the medium term to offset the negative impact on employment of the stronger dollar, she said.
With short-term borrowing costs now near zero, "This shift down implies a delay in the date of liftoff and a shallower path for the federal funds rate over several years," Brainard said."In effect, this spillover from abroad implies some limitations on the extent to which US monetary conditions can diverge from global conditions." Slower expected US growth as the population ages and investor caution in the wake of the 2007-09 financial crisis are also pushing down on the long-term US neutral rate.
Brainard did not address her preferred timing for the Fed's first rate hike in Tuesday's speech; comments in prior speeches suggest she would prefer waiting until 2016.
The Fed will consider whether to raise rates at its last policy meeting of the year, in mid-December.