Lael Brainard, picked for No. 2 Fed spot, pledges to use ‘powerful tool’ on inflation

Lael Brainard, President Joe Biden’s pick for the number two spot at the nation’s central bank, said the Federal Reserve stands ready to quell inflation through higher interest rates.

“We do have a powerful tool and we are going to use it to bring inflation down over time,” Brainard told the Senate Banking Committee in her confirmation hearing Thursday.

Brainard is currently a Fed governor, where she has served since being appointed by the Obama administration in 2014. If confirmed by the Senate, she would be moving up to the role of vice chair, a spot currently occupied by Trump-appointee Richard Clarida (until tomorrow).

Brainard, who also served in roles at the U.S. Treasury, told the Senate that the Fed’s “most important task” is high inflation. Government data released Wednesday showed prices in the United States growing by 7.0% between December 2020 and December 2021, the fastest year-over-year pace of inflation seen since June 1982.

Higher rates coming

The “tool” that can address that inflation is its benchmark for short-term interest rates called the federal funds rate.

When the pandemic triggered economic shutdowns en masse, the Fed lowered the federal funds rate to near-zero. The idea: near-zero borrowing costs would buoy demand through the depths of the pandemic.

[Read: A glossary of the Federal Reserve’s toolbox for the COVID-19 crisis]

The Fed is only now starting to entertain the idea of raising those borrowing costs as policymakers come around to the view that its easy money policies may be too easy.

“We have projected several [interest rate] increases this year,” Brainard told the Senate Banking Committee, adding that the Fed has “a responsibility to bring inflation down.”

If confirmed, Brainard would continue to work with Fed Chair Jerome Powell to see that through.

Powell had his reconfirmation hearing for a second term as Fed chair on Tuesday.

“If we see inflation persisting at high levels, longer than expected, if we have to raise interest rates more over time, then we will,” Powell said.

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Although they are only two of up to 19 officials on the policy-setting Federal Open Market Committee, the Fed chair, vice chair, and the head of the Fed’s outpost in New York have historically made up a “troika” known for its power in steering consensus on the committee.

Brainard was pressed on a number of other topics as well. Although she has pushed for greater attention to climate-related financial risks in the banking system, Brainard said she was not advocating for “stress tests” on individual banks.

The Harvard-trained Ph.D economist also answered questions regarding her $750 campaign donation to Hillary Clinton’s 2016 presidential campaign, a rare move from senior officials at the independent central bank. Brainard said she cleared the donation with the Fed’s ethics office but admitted it was “not something that I would have done” if she had realized the abnormality of such a move.

Brainard is expected to sail through to confirmation. No Republicans on the Senate Banking Committee appeared to strongly oppose her nomination. In 2014, she secured a 61-31 confirmation vote for her Fed governor appointment, with support from senators in both parties.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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