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A top Federal Reserve official downplayed the risks of financial bubbles to the current US economy Tuesday, instead pointing to low inflation as a cause for concern to the central bank.
“Risks to the US financial system do not appear to be flashing red in the way they did in the run-up to previous downturns,” Fed Governor Lael Brainard said Tuesday in a speech in New York City.
Brainard did highlight two areas that she said required vigilance from regulators: High corporate borrowing and “quite lax” underwriting on auto loans. Yet she also said that big banks are more resilient, housing prices are aligned with rents, and stock markets are not near the “dizzying heights” reached in the dot-com bubble.
Instead, she identified low inflation as a “source of concern.”
In recent months, inflation has fallen, moving further away from the Fed’s 2% target. Price gains have eased even as the unemployment rate has fallen to 4.4%. Generally, the Fed would expect to see inflation rising with unemployment falling that low.
Although Brainard indicated that an increase in the Fed’s interest rate target is still in order at the upcoming June meeting, she suggested that future rate hikes might depend on inflation rising again.
Fed members have projected that two quarter-percentage-point rate increases might be in order for this year, and suggested that they might begin shrinking the central bank’s swollen $4.5 trillion balance sheet. Both those actions would put upward pressure on interest rates throughout the economy, on instruments such as credit cards, mortgages, and business loans, slowing spending.