The U.S. should follow a “softer path” for its benchmark federal funds rate give that the economic outlook has weakened and downside risks are rising, said Fed Governor Lael Brainard on Thursday.
“Prudence counsels a period of watchful waiting,” Brainard said in a speech at Princeton University.
Brainard had been a solid supporter of the Fed’s steady interest-rate hikes last year.
In a speech, Brainard said she put weight on sharp 1.2% plunge in retail sales in December, the biggest drop in nine years. Although some analysts had downplayed the decline, Brainard said the sharp sales decline “suggests that growth in consumer spending may be held down in the first quarter of the year.”
In light of these developments, “the best way to safeguard the gains we have made on jobs and inflation is to navigate cautiously on rates,” Brainard said.
This is possible because there are no signs that inflation is picking up, she added.
On the Fed’s balance sheet, Brainard said she supported the decision to end the runoff in assets later this year.
On the future composition of the balance sheet, a critical issue for Wall Street, Brainard said she favored a portfolio of only Treasury securities without any agency mortgage-backed securities.
She noted that the Fed currently holds no Treasury bills and its portfolio has a much longer weighted-average maturity than the current stock of Treasury securities outstanding in the market.
“Given how far out of step the [Fed’s] current portfolio is from common benchmarks, however, it might make sense to weight those purchases more heavily toward Treasury bills and other shorter-dated Treasury securities for a time,” she said, noting that she doesn’t expect a final decision on this for some time.
The Dow Jones Industrial Average
fell on Thursday but still was up 10% year-to-date through Wednesday’s trade.