Fed Governor Brainard Urges Restraint From the Fed on Rates

Single-family building permits climbed to an annual rate of nearly 700,000 units in August, up about 5 percent from the fourth quarter of 2014, but housing growth remains milquetoast at best, Federal Reserve Board Governor Lael Brainard suggested while speaking at the 57th National Association for Business Economics Annual Meeting in Washington, D.C., on Tuesday.

The Fed Governor warned against visceral reactions, such as pushes in the marketplace for an increase in interest rates, given the economy’s fragile growth.

Brainard views housing as going in a positive direction generally, but was quick to point out that current building permit levels remain below fundamental expectations when evaluating factors such as U.S. population growth.

Ongoing slag in the labor market is one of the key culprits, Brainard suggested in her speech.

Employment levels have been a key focus of the Fed’s dual mandate over the last several years, and while Brainard sees improvement in the labor market, she still calls “progress on the second leg of our dual mandate” elusive.

The downside risks make a strong case for continuing to carefully nurture the U.S. recovery--and argue against prematurely taking away the support that has been so critical to its vitality. - Governor Lael Brainard

Brainard started with a dose of good news, but tempered it with a conclusion that clearly draws a parallel between labor market stability and housing’s inability to capitalize on population growth.

Brainard made it known that the labor market edged closer to full employment in 2015, which is good news all around. Still, non-farm payroll employment growth slowed during the past three months to a 167,000 monthly pace, the Fed Governor pointed out. Brainard went on to note that non-farm payroll employment growth has averaged about 200,000 this year.

The Fed has seen the unemployment rate fall a half percentage point since December. Even marginal employment – or those working part-time – saw steady gains, Brainard noted. Yet, the Fed Governor still fell short on optimism, noting that “the labor force participation rate remains materially below the pre-recession trend, even after adjusting for demographics.”

Looking at today’s labor market and the risk of the U.S. feeling the effects of slowdowns in other parts of the world due to the nature of today’s globalized economy, Brainard recommended restraint in turning the corner on interest rates – suggesting they need to be left near zero for the time being.

“I view the risks to the economic outlook as tilted to the downside,” she noted. “The downside risks make a strong case for continuing to carefully nurture the U.S. recovery--and argue against prematurely taking away the support that has been so critical to its vitality.”

With housing tied to employment, wage growth becomes another critical factor – one where the U.S. has failed to see significant improvement.

“Perhaps the most striking evidence in support of continued labor market slack is the absence of any acceleration in wages and prices,” Brainard asserted in her speech. “Our main gauges of wage inflation suggest that labor compensation is increasing at a pace of about 2 to 2-1/4 percent, little different from the rate of increase over the past several years. Indeed, the lack of wage acceleration is likely one of the key reasons that many Federal Open Market Committee (FOMC) participants have revised down their estimates of the longer-run level of the unemployment rate.”