By Michael S. Derby 

Federal Reserve governor Lael Brainard said Tuesday that the recent tumult in the bond market is on her radar screen, as she cautioned market participants that the U.S. central bank remains far from a place where it can start dialing back its support of the economy.

"I am paying close attention to market developments," Ms. Brainard said in a video appearance. "Some of those moves last week and the speed of the moves caught my eye," the official said, adding, "I would be concerned if I saw disorderly conditions or persistent tightening and financial conditions that could slow progress towards our goal."

Ms. Brainard's comment on the state of the bond market came in a speech where the official said the economy is likely to chart a strong recovery this year as vaccines potentially bring an end to the coronavirus pandemic. But even as the economy picks up steam, Ms. Brainard said it is unlikely the Fed will be backing off its strong policy support.

"The economy remains far from our goals in terms of both employment and inflation, and it will take some time to achieve substantial further progress" in moving those two measures back toward where Fed officials want them, Ms. Brainard said. "We will need to be patient to achieve the outcomes set out in our guidance," she said.

Ms. Brainard also said that even when the day does arrive and the Fed can raise rates, "changes in the policy rate are likely to be only gradual." As for Fed bond buying, the purchases "are expected to continue at least at their current pace until substantial further progress has been made toward our goals."

Ms. Brainard spoke amid unsettled financial markets. Over recent days, Treasury bond yields have risen sharply and many market participants have questioned the outlook for monetary policy and wondered if rate increases will arrive sooner than expected, in part to counter higher inflation. When the Fed last offered rate forecasts in December, it suggested it could be several years before it boosts short-term rates from their current near zero levels. The Fed is also buying $120 billion a month in Treasury and mortgage bonds.

So far, Fed officials have largely shrugged off the rise in yields and said it shows a market that is pricing for the prospect of economic recovery and rising inflation. At the same time, Fed officials haven't said they need to take action to limit the increase in yields, which in theory could create headwinds for the recovery.

Ms. Brainard didn't seem alarmed at recent market moves. "Various measures of financial conditions are broadly accommodative relative to historical levels and should remain so," she said.

In a separate video appearance on Tuesday, San Francisco Fed leader Mary Daly, who has a vote on the rate setting Federal Open Market Committee this year, was similarly unworried by the rise in yields.

Ms. Daly, echoing other Fed officials, said the rise in yields is "a sign investors think the future is a little brighter than they thought" and "in many ways it's a good piece of news." Ms. Daly said monetary policy is "in a very good space" right now and she didn't see a need to push back against the bond market, although she noted the Fed retains the ability to push down long-term yields if it chooses to do so.

In her comments on the economy, Ms. Brainard said that while a good recovery path is likely, how well the economy does depends on the rollout of vaccinations and whether variants in the coronavirus could alter the path of the recovery in unexpected ways.

Ms. Brainard said it is very likely that as the economy comes back into action, there will be a short-lived increase in inflation, but she doesn't expect any long-term surge in price pressures. She added the Fed has the tools to deal with unwanted inflation increases, should they arrive.

"A surge in demand and any inflationary bottlenecks would likely be transitory, as fiscal tailwinds to growth early this year are likely to transition to headwinds sometime thereafter," Ms. Brainard said, adding "a burst of transitory inflation seems more probable than a durable shift above target in the inflation trend and an unmooring of inflation expectations to the upside."

Ms. Daly offered a similar view and said inflation is likely to rise over the summer on a temporary basis, and draw no countering response from the central bank.

Write to Michael S. Derby at michael.derby@wsj.com

(END) Dow Jones Newswires

March 02, 2021 17:42 ET (22:42 GMT)