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Fed Governor Brainard: Fed should remain patient in assessing outlook

WASHINGTON, March 7 (Reuters) - Tighter financial conditions and softer inflation expectations mean the U.S. Federal Reserve should hold off on further interest rate rises until the outlook becomes clear, Fed Governor Lael Brainard said on Monday...

WASHINGTON, March 7 (Reuters) - Tighter financial conditions and softer inflation expectations mean the U.S. Federal Reserve should hold off on further interest rate rises until the outlook becomes clear, Fed Governor Lael Brainard said on Monday, suggesting a fractured discussion when officials meet next week.

"Given weak and decelerating foreign demand, it is critical to carefully protect and preserve the progress we have made here at home through prudent adjustments to the policy path," Brainard said in prepared remarks before an audience of bankers in Washington.

"From a risk-management perspective, this argues for patience as the outlook becomes clearer," she said.

Brainard has been a resounding voice among the Fed's six permanent voters on its rate-setting committee in cautioning that weak global growth, smaller output potential for the U.S. economy and lower long-term inflation expectations may require the Fed to keep rates lower for longer.

Other policymakers, however, believe that the strength of the U.S. economy will allow it to shrug off weakening demand abroad and tightening financial conditions.

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They have been encouraged by recent domestic data on job gains, consumer spending and underlying inflation. The strong dollar, a volatile stock market and low oil prices have also shown signs of stabilization.

While she was "heartened" by a robust employment report last Friday and expects consumer spending to continue to grow, Brainard emphasized she still see risks to the downside, noting that "sources of robust demand around the globe are few, and sources of weakness relatively greater."

Emerging market economies grew last year at one-half their average rate from 2009 to 2013, Brainard added, and the impact of the relatively strong dollar on exports could slash one percent off U.S. GDP growth this year.

China will also continue to drag on the global economy, she said.

Brainard reiterated that she is putting a premium on "clear evidence" the Fed's 2 percent inflation target will be reached before considering further hikes.

Core inflation rose 1.7 percent in the twelve months to January, the largest rise since July 2014.

In December, the Fed signaled it expected four rate hikes this year but a tightening in financial conditions since then suggest that median forecast will be revised down when policymakers meet March 15-16.

Investors see the Fed raising rates again in September, according to CME Group's FedWatch.

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By Lindsay Dunsmuir and Howard Schneider

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