Fed should be careful about hiking rates, says Brainard

The Federal Reserve could face limits to its capacity to tighten monetary policy while other central banks implement fresh stimulus measures, a top Fed official said on Tuesday.

Speaking to the Stanford Institute for Economic Policy Research, Fed Governor Lael Brainard said the US central bank should raise rates slowly as weak growth in emerging markets has strengthened the dollar, while keeping inflation low.

That has in turn cast doubts over the level of interest rates the US economy could sustain if growth is to continue.

"This shift down implies a delay in the date of lift-off and a shallower path for the federal funds rate over several years," Brainard said.

"In effect, this spillover from abroad implies some limitations on the extent to which US monetary conditions can diverge from global conditions."

Fed chairwoman Janet Yellen and Chicago Fed chief Charles Evans have both stated that the US central bank should be careful about rising rates too quickly, although policymakers have remained divided over the exact path they should follow.

The uncertainty is largely due doubts over how higher interest rates would hold up in a post-crisis world where global growth remains largely subdued.

Brainard added that to ensure stability, the Fed will have to adopt an approach that "counsels a cautious and gradual approach to adjusting monetary policy."