Delivering her first speech on monetary policy since September, closely watched Fed governor Lael Brainard, considered to be one of Janet Yellen’s most trusted peers, said monetary policy “could be affected for some time by uncertainty surrounding fiscal policy and its effects on the economy”, specifically the magnitude, timing and composition of these changes.
And while the Fed’s recent shift to incorporate the “Trump stimulus” in its forecasts has been duly noted, and according to some has made the Fed more hawkish as the central bank expects substantial stimulus even with employment near capacity (granted, ignoring the 95 million Americans out of the labor force), Brainard on Tuesday took a modest step back and acknowledged that while expansionary fiscal policy could prompt the central bank to undertake a faster pace of interest rate increases and begin shrinking its balance sheet sooner than expected, the details of the policy shifts under Donald Trump are still quite uncertain and could come at “significant costs.”
In other words, the Fed may bypass the near-term impact of the Trump stimulus, and focus on the longer-term, more adverse and deflationary implications by what the president-elect will unveil. Translation: no hikes even as inflation rises “transitorily.” This may be the Fed’s first admission that it could stay pat, and not hike even if Trump manages to push through his proposed $1 trillion stimulus.
This post was published at Zero Hedge on Jan 17, 2017.