NEW YORK (Reuters) - Italy’s political woes pose a threat to synchronized global growth and stand out as a risk worth watching as the Federal Reserve continues to gradually raise U.S. rates in the face of big government stimulus at home, one of the most influential Fed policymakers said on Thursday.
Fed Governor Lael Brainard said that while she was vigilant to possible threats from abroad, the U.S. economy is on a “quite positive” path thanks to tax cuts and fiscal spending that should boost growth this year and beyond.
Her nod to Italy however was the first from the U.S. central bank, which in recent years has at times delayed policy-tightening plans in the face of financial market turmoil. Markets have recovered in recent days after having tumbled earlier this week over the prospect of a new Italian election dominated by debate over Italy’s future in the euro zone.
“Global growth has been synchronized over the past year, but recent developments pose some risk. Political developments in Italy have reintroduced some risk, and financial conditions in the euro area have worsened somewhat in response,” Brainard told the Forecasters Club of New York.
“I continue to view gradual increases in the federal funds rate as the appropriate path, although I will remain vigilant for the emergence of risks and prepared to adjust if conditions change,” she added.
The Fed has raised interest rates six times since late 2015 and is expected to hike another notch in June, to a range of 1.75 to 2 percent. That would bring policy closer to the Fed’s estimated “neutral” level of about 2.9 percent, even while other estimates from central bankers see rates rising to about 3.4 percent by 2020.
Brainard, who leans dovish and has a permanent vote on policy, said she expects rates to gradually rise “modestly beyond neutral.” But she noted that over the longer run, as the fiscal stimulus fades, that neutral policy estimate should remain at historically low levels.
U.S. unemployment is at a 17-year low and inflation has risen close to a 2-percent Fed target. Years of too-low prices is another reason to raise rates gradually, Brainard said.
Yet “recent developments abroad suggest some risk to the downside,” she added, highlighting the possibility that rising U.S. rates prompt more capital flows from emerging markets. “Although stresses have been contained to a few vulnerable countries so far, the risk of a broader pullback bears watching,” she said.
On a day that the White House said it will impose tariffs on aluminum and steel imports from Canada, Mexico and the European Union, angering those allies, Brainard said “uncertainty over trade clouds the horizon ... and could prove disruptive at home and abroad.”
Reporting by Jonathan Spicer; Editing by Chizu Nomiyama