Fed’s Brainard says U.S. economy needs ‘softer’ rate path

(Reuters) – The U.S. Federal Reserve should downgrade its expectations for rate hikes even if its outlook for the economy has not changed because of rising risks and signs of a slowdown in spending, Governor Lael Brainard said on Thursday.

“Heightened downside risks to output and employment would argue for a softer federal funds rate path even if the” most likely “outlook for the economy were unchanged,” Brainard said in remarks prepared for delivery at Princeton University.

Policymakers are gearing up for a March 19-20 meeting of the rate-setting Federal Open Market Committee. Markets have written out the chance that a rate hike would be in the cards anytime soon especially given the chance that weakening Chinese and European economies could spoil the world’s largest economy, concerns Brainard echoed in her speech.

Brainard said she has seen both an increase in risks to the U.S. economy as well as signs in current data that businesses and consumers are spending less money, and that “the best way to safeguard the gains we have made on jobs and inflation is to navigate cautiously on rates.”

She added: “Prudence counsels a period of watchful waiting.”

The remarks are among the first by top Fed officials to draw attention, albeit vague, to the possibility that the central bank’s next move could even be a rate cut, which the market now thinks is more likely than a hike. Last year the bank raised rates once each quarter.

“We would not want the balance sheet to be shrinking at a time when the FOMC thought it was appropriate to cut the federal funds rate,” said Brainard, who has called for an end to the Fed’s bond runoff this year.

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