Fed’s Brainard says U.S. economic slowdown may be more than temporary

By Howard Schneider

WASHINGTON (Reuters) – The U.S. economy’s recent poor performance may be more than transitory, as the full impact of weak consumer spending, low investment and a strong dollar become apparent, Federal Reserve board member Lael Brainard said on Tuesday.

Brainard sounded the strongest warning so far from any Fed rate setter over the risks to the economy. Most, including Fed Chair Janet Yellen, have insisted that a rate hike remains in the cards this year as the economy improves and have termed the poor first quarter a blip.

“It would be difficult … to dismiss the possibility of a more significant drag on the economy,” Brainard said in a speech at the Center for Strategic and International Studies at which she indicated a rate hike may still be a ways off.

“There is value to watchful waiting while additional data help to clarify the economy’s underlying momentum.”

Adding a bearish voice to the debate over the economy, Brainard gave the fullest exposition yet of how a strong dollar, weak foreign demand and the collapse in oil prices have complicated the U.S. outlook. The expected benefits – of higher consumer spending, for example – have yet to materialize, while the drag on exports has been more severe and longer lasting than anticipated.

“The data are presenting a mixed picture … there may be reason not to ignore recent readings entirely,” with the second quarter not yet showing signs of the expected “bounceback” from the dismal start of the year, Brainard said.

The U.S. economy contracted 0.7 percent in the first quarter, according to revised data issued last week, and was seen growing just 0.8 percent in the second quarter, according to an influential Atlanta Fed survey.

Brainard suggested a more long-lasting process may be under way that could, she hinted, put the Fed in an indefinite holding pattern, saying the recovery so far has been a story of “fits and starts.”

“The underlying momentum of the recovery has proven relatively susceptible to successive headwinds,” Brainard said.

Headwinds from abroad, including the risks associated with a Greek default and a slowdown in China, “may persist for some time,” she said.

The Fed’s policy setting committee meets in June and for the first time since the crisis will have the door open to an interest rate increase. Fed officials have signaled a June hike is unlikely, given the recent disappointment in some economic data and concerns that a more significant slowdown may be taking shape.

A recent appointee to the Fed, Brainard was previously head of international economic matters at the Treasury Department, closely attuned to issues like the structural economic problems faced by China and the implications of the euro zone crisis.

Many Fed officials have suggested the troubles overseas would have only a transitory effect on the U.S. economy. Brainard’s comments were the most forceful yet of how overseas troubles may further delay the Fed’s rate liftoff.

(Reporting by Howard Schneider; Editing by Chizu Nomiyama and Meredith Mazzilli)