The Federal Reserve appears ready to accept that its inflation assessments have been wrong, indicating an important shift in how it will approach rate hikes ahead.
In a speech Tuesday, Fed Governor Lael Brainard said the long-standing assessment at the central bank that persistently low inflation is the result of transitory factors that eventually will pass does not add up considering current circumstances.
As a result, she said, policymakers should reconsider the current path they expect for future rate hikes.
"I am concerned that the recent low readings for inflation may be driven by depressed underlying inflation, which would imply a more persistent shortfall in inflation from our objective," Brainard told the Economic Club in New York. "In that case, it would be prudent to raise the federal funds rate more gradually."
Brainard's comments are important because she is considered a close ideological ally of Fed Chair Janet Yellen. While Yellen herself has indicated that the end of the rate-hiking cycle could be near, she and her fellow Federal Open Market Committee members have stood by the belief that inflation ultimately will gravitate toward their 2 percent target.
Tuesday's speech challenges that notion.
Specifically, Brainard pointed to the current low unemployment rate — 4.4 percent — and compared it to the last time the economy was around "full employment" from 2004 to 2007. During that run, inflation averaged about 2.2 percent. Currently, the three-year average is 1.5 percent.
Brainard acknowledged that certain factors driving down inflation, such as a drop in cellphone rates, are transitory. But she said there also are temporary factors pushing up inflation, such as a rise in prescription drug prices.