Fighting inflation requires “further policy tightening that is sustained over a longer period of time,” says the Fed’s Daly
Federal Reserve Bank of San Francisco President Mary Daly said policymakers will likely need to raise interest rates higher and keep them high for an extended period of time.
“It is clear that there is still more work to be done,” Daly said Saturday in a speech he was preparing for a speech at Princeton University in New Jersey. “Moving out of this episode of high inflation will likely require further tightening of monetary policy, sustained over an extended period of time.”
Daly said inflation remains high in every sector – goods, housing and other services – and the bumpy nature of the incoming data paints an unclear picture for disinflation dynamics. While Daly is not voting on policy this year, she is attending meetings and discussions of the Federal Open Market Committee.
The Fed has tightened aggressively over the past 12 months, raising interest rates from near zero to a target range of 4.5% to 4.75%, although policymakers have recently slowed the pace of rate hikes. They fell a quarter of a point on Feb. 1 after rising half a point in December, following four consecutive 75 basis point increases.
“This tightening, while pronounced, was and is appropriate given the magnitude and persistence of elevated inflation readings,” Daly said.
Daly has said in the past that interest rates will likely need to rise above 5% to sufficiently cool demand and bring down inflation. She said last month that the FOMC’s December forecast – which shows median rates of 5.1% this year – still gives a good signal as to where policy is likely to be headed.
Inflation, which hit a 40-year high last year, eased in the final three months of 2022 but picked up again in January. This month’s data also showed strong consumer demand and blockbuster corporate hiring.
Several of Daly’s colleagues have since said interest rates may need to rise higher than they previously thought, and investors are now betting on a high of around 5.45%. That level could be reached with 25 basis point hikes in each of the next three sessions. Daly didn’t indicate in Saturday’s speech how much more tightening she thinks appropriate.
Policymakers will update their economic forecasts at their March 21-22 meeting.
Daly also spoke about the uncertainty of what will be driving future inflation the most. For years prior to the pandemic, Fed officials struggled to bring rates to the central bank’s 2% target as an aging workforce and sluggish productivity growth weighed on inflation.
Now, new factors such as manufacturing offshoring, domestic labor shortages, the need for greater investment in technology and infrastructure as a shift to greener energy sources and a possible change in inflation expectations could push inflation higher. How these forces interact with past disinflationary forces remains to be seen, Daly said.
“We don’t know what the trend is going to be,” Daly said. “But we know that as we continue to diffuse the ongoing shock to inflation, we need to work to gather data and research that sheds light on the likely path forward.”
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