The prospects for an interest rate hike in March got a lift Wednesday night as one of the most dovish members of the Federal Reserve signaled openness to tightening monetary policy.
Lael Brainard, a member of the Fed’s Board of Governors, said in a speech prepared for delivery at Harvard that “it will likely be appropriate soon” to raise rates.
In recent years, Brainard has been among the Fed members most skeptical of raising interest rates, on the grounds that inflation is below the Fed’s target and the central bank can’t count on it rising just because unemployment has dropped.
But on Wednesday, she suggested that the U.S. economy is in “transition” and that her concerns about too-low inflation have abated.
Several other members of the Fed hinted this week that they are prepared to raise the interest rate target at the next meeting, scheduled for March 14 and 15. Investors now expect the Fed to move, a factor driving stock markets to record highs Wednesday.
With the economy turning a corner, Brainard said, the Fed must begin weighing how and when to allow its $4.5 trillion balance sheet, swollen by emergency bond purchases meant to stimulate the economy, to begin shrinking.
One factor that likely played into Brainard’s relatively optimistic comments Wednesday evening was a report from the Bureau of Economic Analysis in the morning showing that inflation was running at 1.9 percent in January, according to the metric preferred by the Fed, just below the Fed’s 2 percent target. The Fed hasn’t hit its target since early 2012.
