Federal Reserve Bank of San Francisco President Mary Daly said that although inflation still has a ways to go to come down to the US central bank’s 2% goal, the economy may be able to slow enough on its own to accomplish that, without further policy action.
(Bloomberg) — Federal Reserve Bank of San Francisco President Mary Daly said that although inflation still has a ways to go to come down to the US central bank’s 2% goal, the economy may be able to slow enough on its own to accomplish that, without further policy action.
“Looking ahead, there are good reasons to think that policy may have to tighten more to bring inflation down,” Daly said Wednesday in remarks at an event at the Salt Lake Chamber in Utah. “But there are also good reasons to think that the economy may continue to slow, even without additional policy adjustments.”
That dovish scenario from Daly, who this year doesn’t vote on the policy-setting Federal Open Market Committee, echoed the tone from Chicago President Austan Goolsbee. Goolsbee, who does vote on rates this year, earlier this week left the door open to a potential pause at the Fed’s next meeting in May.
Other Fed officials have sounded more hawkish, adding to expectations in markets for one more quarter-point increase on May 3, before a pause.
Daly noted that the economy remains strong, with both inflation and the labor market still hot. But she also pointed to headwinds coming, including from a tightening in credit and a slowing global economy. She also highlighted the effects of the Fed having “considerably” ratcheted up rates over the past year.
‘Work to Do’
“It will likely take some time for those increases to take their full effect,” Daly said. For now, “while the full impact of this policy tightening is still making its way through the system, the strength of the economy and the elevated readings on inflation suggest that there is more work to do,” she said.
Still, she said that there was “good news” from the consumer price index report earlier in the day, which showed that inflation moderated in March. Price gains do remain elevated, she also said, in a question-and-answer session following her speech.
Daly noted that her own expectation is for inflation to decelerate to slightly above 3% at the end of this year. She also said that while she sees growth slowing quite substantially, she doesn’t expect a recession in the US.
“If we force an unnecessary contraction, that hurts the very people we’re trying to assist by bringing inflation down,” Daly said.
Policymakers will need to assess a wide variety of data in setting policy, Daly said. Those sentiments are in line with a more meeting-by-meeting approach to rate increases that the Fed signaled at its March meeting would be the likely strategy going forward.
Daly said tighter credit conditions, especially with reduced bank lending in the wake of the collapse of Silicon Valley Bank and others, global central bank tightening and the Fed’s own aggressive actions will need to be constantly evaluated.
The speech was Daly’s first since last month’s FOMC meeting. The San Francisco Fed, along with the Fed Board in Washington, has come under scrutiny following the failure of SVB, which was was supervised by both entities.
Daly didn’t comment directly on SVB’s collapse, saying that the banking system is sound and resilient and noting that Michael Barr, the Fed’s vice chair for supervision, is conducting an investigation into that bank’s supervision and regulation. The results of that will be released May 1.
(Updates with comments from question-and-answer session, starting in second paragraph after ‘Work to Do’ subheadline.)
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