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Fed's Brainard, citing improved global economy, says rates can rise 'soon'

Federal Reserve Governor Lael Brainard delivers remarks on "Coming of Age in the Great Recession" at the Federal Reserve's ninth biennial Community Development Research Conference focusing on economic mobility in Washington, DC, U.S. on April 2, 2015. REUTERS/Yuri Gripas/File Photo

By Howard Schneider

BOSTON (Reuters) - An improving global economy and a solid U.S. recovery mean it will be "appropriate soon" for the Federal Reserve to raise U.S. interest rates Fed Governor Lael Brainard said on Wednesday, adding an important voice to the chorus of officials signalling rates may rise as soon as mid-March.

Brainard was a key voice throughout 2015 and 2016 in warning that trouble in Europe and slower-than-expected growth in China could hurt the United States, an argument that helped slow the Fed's expected pace of tightening.

Now, she said in an address at Harvard University, the clouds seem to be lifting.

"We are closing in on full employment, inflation is moving gradually toward our target, foreign growth is on more solid footing, and risks to the outlook are as close to balanced as they have been in some time," Brainard said. "Assuming continued progress, it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path."

"After being an important constraint in the past few years, the external environment currently appears more benign than it has been for some time," Brainard said, directly addressing the set of risks that led her to become one of the stronger advocates for delaying any rate increase until the global environment improved.

Recent moves by China have helped, she said, while the European Central Bank's patient and persistent bond buying, among other policy moves, appears to be paying off.

Coupled with the comments of other Fed officials in recent days, and looking ahead to remarks by Fed chair Janet Yellen on Friday, Brainard's comments will likely help cement sentiment that a rate increase when the Fed meets in two weeks is now the assumed outcome.

The likelihood of continued rate increases is now such that Brainard also included an extended discussion of how she thinks the Fed should manage its $4.5 trillion balance sheet, an issue the Fed has formally pushed to near the end of its rate increase cycle. Brainard said she felt the Fed's security holdings should be left as they are for now, given a "subordinate" role to raising rates.

Coupled with the outlook of even a few months ago, when fallout from the Brexit vote by the United Kingdom raised the risk of a fractured European Union, the global economic news has been relatively encouraging.

"Several challenges...have so far been navigated without significant damage to growth, financial stability, or inflation expectations," Brainard said.

The news in the U.S. has also been positive.

"We will continue to edge closer to our goals in the months ahead. Consumption growth has been encouraging, supported by continued job gains, rising wealth, and greater confidence," Brainard said. "Given the progress we have seen and the positive momentum in the incoming data, continued gradual removal of accommodation is likely to be appropriate."




(Reporting by Howard Schneider; Editing by Diane Craft)