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Fed's Brainard Says Central Bank Should Welcome Modest Rise in Inflation

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05/16/2019 | 12:32pm EDT

By Nick Timiraos

WASHINGTON -- A top Federal Reserve official said Thursday the central bank's commitment to maintaining stable prices would benefit from a modest rise in inflation over the coming years, an indication the central bank wouldn't need to raise interest rates should inflation increase.

Fed governor Lael Brainard said underlying inflationary pressures, after filtering out transitory and idiosyncratic factors, "appears to be somewhat below" the Fed's 2% goal, a surprising development given continued declines in unemployment.

Ms. Brainard didn't say whether the Fed should consider cutting interest rates to boost inflation in her prepared remarks at a tax policy conference in Washington, a possibility raised by some Fed officials in recent weeks.

"It is not entirely clear how to move underlying trend inflation smoothly to our target on a sustained basis in the presence" of forces that have made inflation less responsive to tighter labor markets, she said.

Excluding volatile food and energy categories, inflation measured by the Fed's preferred gauge rose 1.6% from a year earlier in March, down from 1.8% in January and 2% in December.

Ms. Brainard said one way to better achieve the Fed's 2% target might be to take advantage of a so-called "opportunistic reflation," in which the Fed would seek a modest overshooting of its 2% goal "for a couple of years."

"The Federal Reserve could use that opportunity to communicate that a mild overshooting of inflation is consistent with our goals and to align policy with that statement," said Ms. Brainard.

Ms. Brainard described the economy as relatively healthy in her remarks, calling attention to a "strong" labor market and confident consumers. One area of concern is trade, which she said is "creating uncertainty."

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