Former Fed vice chair Lael Brainard says she’d back a December rate cut as cracks form ‘under the hood’

The inflation fight may be nearing the end, but the political one is just beginning.

Former Federal Reserve vice chair Lael Brainard said she would support a rate cut at the central bank’s December meeting, warning that cracks are forming “under the hood” of an economy increasingly defined by an AI-fueled divide.

“I would be concerned about the weakening labor market,” the veteran economist said at Yahoo Finance Invest 2025. “I think I would take the risk that perhaps tariffs push prices higher for a little longer against the risk that we really see a self-reinforcing downturn in the business sector that leads to real pain for American households.”

Brainard, who has also held senior roles at the Treasury Department, the White House, and the Brookings Institution, said the Fed now faces a delicate balancing act.

“I think they [the Fed] are in a difficult spot because they have the most powerful inflation fighting tool,” she said. “With inflation now continuing to come down, but stalling out around 3% … they are concerned about inflation. I think most members of the committee believe that this is a transitory impact. They don’t like to use that word, but they do expect the tariff effects to dissipate.”

Policymakers may need to pivot to preserving employment and sustaining growth. However, she warned that this depends on a factor suddenly under strain: the Fed’s independence.

Brainard has cautioned that efforts to politicize or pressure the central bank could lead to higher inflation, placing a bigger burden on lower-income workers.

“I think everybody should be concerned because, of course, the Federal Reserve’s independence is what is key to its credibility on inflation fighting,” she noted, referencing policy missteps of the 1970s that contributed to stagflation and rising unemployment.

The real risk now, she added, is not inflation — it’s protecting the gains without sacrificing momentum or employment. Even as GDP growth remains solid — the second quarter came in at 3.8%, and the third quarter is expected to be similar — Brainard said the strength is misleading.

“The economy at the top level is strong” she said. “But again, it’s being driven by this really important set of investments in AI. The rest of the economy under the hood is really stuck.”

That “two-track economy” is creating stark divides. The AI and tech sectors are booming, yet they’re not hiring, while much of the rest of the economy struggles with weak demand, higher costs, and uncertainty about how to integrate AI into existing business models, Brainard points out.