Risks to economy from unexpected weakness greatest, Fed's Brainard says

Risks to the economy from unexpected weakness in demand were greater than those from unexpected strength, a top US central bank official said.

Speaking to The Chicago Council, US Federal Reserve Governor Lael Brainard said that the "asymmetry" in risks "counsels prudence in the removal of policy accommodation".

"In today's new normal, the costs to the economy of greater-than-expected strength in demand are likely to be lower than the costs of significant unexpected weakness. In the case of unexpected strength, we have well-tried and tested tools and ample policy space in which to react.

"Moreover, because of Phillips curve flattening, the possibility of remaining labor market slack, the likely substantial response of the exchange rate and its depressing effect on inflation, the low neutral rate, and the fact that inflation expectations are well anchored to the upside, the response of inflation to unexpected strength in demand will likely be modest and gradual, requiring a correspondingly moderate policy response and implying relatively slight costs to the economy," Brainard said in prepared remarks for her speech.

The path of policy can be continued "in the months ahead", she added.

"I look forward to assessing the evolution of the data in the months ahead for signs of further progress toward our goals, bearing in mind these considerations."

As of 2033 BST the yield on the benchmark 10-year US Treasury note was off by one basis point to 1.67%.

In parallel, Fed funds futures were pricing-in a 59.2% probability of a 25 basis point rate hike at the Federal Open Market Committee's December 13-14 gathering, and 15.0% odds of a move in September, according to the Chicago Mercantile Exchange's Fed Watch Tool.