Restrictive monetary policy needed: US Fed's Vice Chair

NEW YORK: Vice-Chair of the US Federal Reserve, Lael Brainard, said monetary policies need to be restrictive for "some time" to provide confidence that inflation moves down towards the target.

"We are in this for as long as it takes to get inflation down. So far, we have expeditiously raised the policy rate to the peak of the previous cycle, and the policy rate will need to rise further," Brainard said on Wednesday at the Clearing House and Bank Policy Institute 2022 Annual Conference.

The US economy has been going through a rough patch with high inflation and negative growth.

Brainard said the US central bank was taking actions to keep inflation expectations anchored and bring inflation back to 2 per cent over time adding that it may take some time for the full effect of these tighter financial conditions to work their way through the economy.

"How long it takes to move inflation back down to 2 per cent will depend on a combination of continued easing in supply constraints, slower demand growth, and lower markups, against the backdrop of anchored expectations," Brainard added.

Regarding supply constraints, a variety of indicators were showing signs of improvement, the vice chair added.

"Together, the increase in the policy rate and the reduction in the balance sheet should help bring demand into alignment with supply." In conclusion, the vice chair said the central bank's resolve was firm, goals clear, and tools were up to the task of dealing with the situation.

For the record, consumer inflation or Consumer Price Index in the US was at 8.5 per cent in July compared to a year ago period, US Bureau of Labor Statistics data showed.

The inflation print for the month was down from a four-decade high of 9.1 per cent in June.

In the backdrop of an over four-decade high inflation in the country, the US Federal Open Market Committee had in its latest meeting raised the key policy interest rate by 75 basis points to 2.25-2.50 per cent, anticipating that the increase in the interest rates will be "appropriate".

Hiking interest rates typically cool demand in the economy, thereby putting a brake on the inflation rate. The US Federal Reserve in its June meeting too raised the interest rate by 75 basis points, which was then the steepest hike since 1994.

Meanwhile, real gross domestic product (GDP) in the US marked the second consecutive quarter of degrowth, which qualifies for a technical recession.

A technical recession is often defined in which there have been two consecutive quarters of negative growth in the real GDP.