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Fed's Brainard: Not seeing significant Q2 bounce

Economic data so far do not suggest that the U.S. will see a significant second quarter rebound, Federal Reserve Governor Lael Brainard said Tuesday.

Brainard, a voting member of the Federal Open Market Committee, also said a strong dollar delays U.S. rates to normal levels. But despite the downbeat assessment of the U.S. economy, she said that a 2015 rate hike is still possible. (Tweet This)

"No doubt, bad weather, port disruptions, and statistical issues are responsible for some of the softness in first-quarter indicators of aggregate spending," she said at the Center for Strategic and International Studies in Washington, D.C. "But there may be reasons not to ignore the recent readings entirely."

Lael Brainard
Andrew Harrer | Bloomberg | Getty Images
Lael Brainard

The dollar's rise, she said, reduces net exports, and that drag can last for some time. In total, net exports subtracted "a whopping" 1.9 percentage points from first quarter GDP, Brainard said.

"This large decline likely reflects more than exchange rate appreciation alone, but some drag on net exports from exchange rate appreciation is likely to persist," she said.

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Foreign headwinds also hurt U.S. manufacturing and inflation, she said.

On the jobs side, the pace of gains has slowed, and wage growth remains soft, she said. The natural rate of unemployment may have declined, she added.

Consumers, for their part, are not inclined to spend their gas price windfalls, Brainard said.

"My own reading is that earlier, more optimistic growth projections may have placed too much weight on the boost to spending from lower energy prices and too little weight on the negative implications for aggregate demand of the significant increase in the foreign exchange value of the dollar and large decline in the price of crude oil," she said.

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As for Fed policy, Brainard said a hike could still occur before the end of the year, and that she would like to move rates "step by step."

"While the case for liftoff may not be immediate, it is coming into clearer view," she said.

Brainard formerly served as the U.S. undersecretary of the treasury for international affairs.

Read Brainard's full speech here.