Federal Reserve Vice Chair Lael Brainard on Monday reiterated the U.S. central bank's plan to continue tightening monetary policy until there is clear evidence that inflation has slowed down, warning the U.S. economy will likely slow further as a result of elevated interest rates.
"Monetary policy will be restrictive for some time to ensure that inflation moves back to target over time," Brainard said. "It will take time for the cumulative effect of tighter monetary policy to work through the economy and to bring inflation down."
The Fed has already raised interest rates five times this year as it tries to wrestle inflation that is still running near a 40-year high back to its 2% target goal.
In its latest move, the Fed approved a third consecutive 75-basis-point rate hike, lifting the federal funds rate to a range of 3% to 3.25% – near restrictive levels. It also indicated that more super-sized increases are likely in the coming months.
Brainard – the Fed's No. 2 and a permanent voting member of the Federal Open Market Committee – said during prepared remarks delivered before the National Association for Business Economics in Chicago that the economy is likely to cool over the next year as rates remain elevated.
"The moderation in demand due to monetary-policy tightening is only partly realized so far," she said.
The economy has already cooled significantly in the U.S., with gross domestic product – the broadest measure of goods and services produced in a nation – contracting by 1.6% in the winter and 0.6% in the spring.
Brainard noted that Americans' savings have also dwindled faster than the Fed anticipated, suggesting there could be a pullback in spending soon.
There is a growing expectation on Wall Street that the Federal Reserve will trigger an economic downturn as it raises interest rates at the fastest pace in three decades to catch up with runaway inflation.
Fed Chair Jerome Powell has all but conceded the central bank will tip the economy into a recession with its rapid rate hikes, warning that higher rates will cause economic "pain."
"The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive or restrictive for longer," Powell told reporters in Washington in September. "Nonetheless, we’re committed to getting inflation back down to 2%. We think a failure to restore price stability would mean far greater pain."