Fed's Brainard: Case to Tighten Policy Preemptively Is Less Compelling

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WASHINGTON�Federal Reserve governor Lael Brainard on Monday urged "prudence in the removal of policy accommodation," arguing that improvement in the labor market hasn't had the desired effect on inflation.

Since the impact on inflation of further improvement in the labor market is likely to be moderate and gradual, "the case to tighten policy preemptively is less compelling," she said according to the pre-released text of a speech for delivery at the Chicago Council on Global Affairs.

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"My main point here is that in the presence of uncertainty and the absence of accelerating inflationary pressures, it would be unwise for policy to foreclose on the possibility of making further gains in the labor market," she said in her first speech since June.

Ms. Brainard joined the Fed board just over two years ago, and has emerged as a voice favoring a go-slow approach on raising interest rates given risks to economic growth from weak inflation and emerging markets' volatility.

Her closely watched remarks come amid jitters in global stock markets in recent sessions about the outlook for global central banks' policies. Fed officials meet next week and are likely to discuss whether to raise their benchmark federal-funds rate from its current range between 0.25% and 0.50%. They have held it steady since lifting the band by a quarter percentage point in December.

Ms. Brainard's speech, which will be followed by a question-and-answer session, is the last scheduled appearance by a Fed official before the central bank's self-imposed blackout period begins Tuesday, a period in which officials stop making public comments about the economy and monetary policy and engage in intensifying discussions about the statement that will come out of their policy meeting.

Ahead of Ms. Brainard's speech, two regional Federal Reserve bank presidents said they see little urgency to take action at the meeting, which follows a slowdown in hiring in August.

While Federal Reserve Bank of Atlanta President Dennis Lockhart said Monday that economic conditions warrant a "serious discussion" about raising rates, he didn't "feel that we are incurring the costs of patience that put a lot of urgency on the question of raising rates." He declined to say when he would like to see the central bank next act.

His counterpart at the Minneapolis Fed, Neel Kashkari, said in comments regarding the economy on CNBC early Monday that "there doesn't appear to be [a] huge urgency to do anything, frankly." Instead, "let's get as much data as we can and let's try to get our inflation back up."

Unlike Ms. Brainard, neither Mr. Lockhart nor Mr. Kashkari is currently a voting member of the rate-setting Federal Open Market Committee. However, the nonvoting presidents do participate in policy discussions at the gatherings.

Financial markets don't see a strong likelihood that the Fed will raise rates next week. Before Ms. Brainard's speech Monday, traders in futures markets put a mere 21% probability on a Fed increase at the Sept. 20-21 meeting. They see the probability of a Fed rate increase this year at nearly 59%.

However global stock markets were shaken late last week when the European Central Bank left its stimulus unchanged at a policy meeting, disappointing investors who had expected the ECB to do more.

Furthermore, a Fed official previously known as an outspoken advocate for holding interest rates low signaled openness to higher borrowing costs. Federal Reserve Bank of Boston President Eric Rosengren said Friday that "a reasonable case can be made" for raising interest rates to avoid overheating the economy given the strength of the labor market and a steep rise in asset prices.

Fed Chairwoman Janet Yellen said in late August that "the case for an increase in the federal-funds rate has strengthened in recent months."

Write to Harriet Torry at harriet.torry@wsj.com