Fed governor Lael Brainard says "new normal" calls for stronger inflation and tighter regulation

FEderal Reserve Governor Lael Brainard said on Thursday that the United States is in a "new normal" that forces the central bank to seek higher inflation to ensure healthy growth, but also increased regulatory vigilance for avoid a financial crisis.

The new normality, Brainard explained, is that the very low unemployment rate did not translate into higher inflation, as one would have expected, even if the objective of the Fed's rate of interest is low by historical standards.

Brainard acknowledged the positive aspects of the new normal, including the fact that the low unemployment rate has generated jobs for disabled workers and others who might otherwise have trouble finding a job, but cautioned that Low interest rates in effect could increase risk taking by lenders and borrowers.

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"In the current new reality, it is important to sustainably achieve inflation expectations and reach our 2% target while protecting us against financial imbalances," said Brainard in a speech prepared for a speech at the National Tax Association in Washington. "We want to be aware of the risk of financial imbalances that could amplify any shock and help to tip the economy into recession, which the Federal Reserve has less conventional space to deal with in the context of rising rates. current low. "

Underlying inflation is established at 1.6% in the last reading of the Fed's favorite indicator.

To adjust, she added, the Fed should raise regulatory standards for banks, including raising capital requirements.

More specifically, Brainard reiterated its call to increase the Fed's countercyclical buffer, a mechanism that allows banks to maintain higher levels of capital in the event of an economic downturn or other financial shocks. The Fed's governor argued that buffer activation could also serve as a brake to prevent banks from over-spreading.

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Brainard's prescription places her in a minority on the Fed's board of directors, which aims to adapt banking regulations to commercial activities, as well as the amount of capital that banks are required to pay. hold. But the Fed is wondering if it should change its approach to monetary policy.

"The Federal Reserve has been discussing for some time the relevance of this new normality to our framework," said Brainard. "[W]We must be particularly careful to preserve as much as possible our conventional political space, while exploring mechanisms to increase the effectiveness of our framework. "