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Brainard advises Fed 'watch and wait' until global risks recede

The Federal Reserve building in Washington, D.C.
Kevin Lamarque | Reuters
The Federal Reserve building in Washington, D.C.

The Federal Reserve should hold off on any interest rate hike until it is clear that a global slowdown, trouble in China and other international risks will not push the U.S. recovery off course, Fed Governor Lael Brainard said on Monday in one of the strongest defenses yet of a go-slow approach to policy.

Brainard has been among the most vocal Fed members in her concern about the likelihood that economic trouble in China could blow back on the United States. She extended that argument on Monday into a discussion of how whole regions of the world are being impacted by China's slowdown.

The risks that the rest of Asia and commodity exporters in general will grow more slowly because of weak demand in China means the United States faces a continued drag from lower exports, a stronger dollar and generally slack world economic conditions.

While the current U.S. outlook is good, "we should not take the continued strength of domestic demand growth for granted," Brainard said in remarks prepared for delivery to the National Association for Business Economics.

"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," she said.

With inflation and wage growth in the United States still weak, Brainard said this was a time "for watching and waiting," not risking a rate hike that may have to be reversed.

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Brainard's comments are the most explicit yet from a member of the Fed's Washington-based Board of Governors calling for what could be a longer delay in a rate hike.

Brainard said she was explicitly avoiding "calendar" guidance, and did not in her prepared remarks say if she felt rates were likely to rise this year. It has become a staple piece of other Fed speakers in recent weeks to voice confidence that rates will be raised at either the upcoming October or December meetings.

Brainard said that a rapid rise in inflation appears to be a low risk, and the Fed has the tools to control it. With rates at zero, she said, the Fed has only unconventional tools to fall back on if unemployment starts rising again.