Federal Reserve Gov. Lael Brainard sees “solid” economic growth continuing next year but the possibility of a slowdown to the U.S.’s relative boom times in 2020.
Brainard commented on the economic outlook in remarks prepared for delivery in Washington Friday in which she indicated that the central bank is increasingly weighing whether the economy is strong enough to support significantly higher interest rates.
“The economy has grown 3 percent over the past year, and there are good reasons to expect growth to remain solid next year, supported by the strong underlying momentum in domestic demand,” Brainard said. She noted, though, that the global economy could constrain growth next year, and she argued that the positive economic effects from the Trump tax cuts will fade going into 2020, when Congress and the White House may also seek to cut spending to address mounting deficits.
“Here at home, the impetus to growth from fiscal policy is likely to fade going into 2020,” Brainard said. “Although it is reasonable to expect fiscal spending to be extended around current levels in real terms … we cannot rule out that fiscal policy could become a headwind in 2020.”
Brainard said that the relative strength of domestic markets in the U.S. could buffer the economy from overseas instability brought on by trade, Brexit, and a potential Italian debt crisis, but that businesses may invest less than expected, despite lower taxes and increased incentives to invest from last year’s tax law, due to the administration’s trade wars.
“Here at home, we hear from businesses that the uncertainty associated with trade policy and the implications for supply chains may weigh on business capital spending,” Brainard said.
Brainard also argued that the next recession could again come from the financial sector, as the last three recessions have, and repeated a call for regulators to require banks to keep more cash on hand to allow them to more easily weather a downturn. The Fed governor cited corporate debt, which increased as companies gobbled up cheaper loans to expand during the past several years, as an area of concern as the economy potentially slows down in the next year or two. A slowdown could affect the ability of those businesses to repay their debts as they bring in less money.
“Over-indebted businesses may face payment strains when earnings fall unexpectedly, and they may respond by pulling back on employment and investment,” said Brainard.