Fighting inflation requires ‘more policy tightening, sustained for longer,’ says 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 at high levels for a longer period of time.

“It’s clear there’s a lot of work to do,” Daly said Saturday in remarks prepared for a speech at Princeton University in New Jersey. “To put this period of high inflation behind us, further tightening of policy, sustained for a longer period of time, will likely be necessary.”

Daly said that inflation remains high in every sector – goods, housing and other services – and that the bumpy nature of future data paints an ambiguous picture for disinflation momentum. While Daly did not vote on policy this year, he participated in meetings and discussions with the Federal Open Market Committee.

The Fed has been tightening aggressively over the past 12 months, raising the benchmark policy rate from near zero to a target range of 4.5% to 4.75%, although policymakers have recently slowed the pace of hikes. rate. They downshifted to a quarter-percentage-point move on February 1 after a half-point hike in December, which followed four consecutive 75-basis-point increases.

“This tightening, while pronounced, was and remains appropriate given the magnitude and persistence of high inflation readings,” Daly said.

Daly previously said interest rates would likely need to rise above 5% to do enough to cool demand and lower inflation. she SAYS last month the FOMC’s December projections – which showed rates peaking at 5.1% this year, according to the median forecast – are still a good signal of where policy is likely to be headed.

Inflation, which reached a 40-year high last year, fell in the last three months of 2022, but rebounded in January. The month’s data also showed strong consumer demand and blockbuster hiring by companies.

Many of Daly’s colleagues have said that interest rates may need to be higher than they previously thought, and investors are now betting on a peak of around 5.45%. That level could be reached by a 25-basis-point hike in each of the three following meetings. Daly did not specify in Saturday’s speech what further tightening he thought would be appropriate.

Policymakers will update their economic projects at their March 21-22 meeting.

Daly also talked about the uncertainty of what will most stimulate future inflation. Before the pandemic, Fed officials struggled for years to get rates up to the central bank’s 2% target as an aging workforce and slow productivity growth weighed on inflation.

Today, new factors including changes in production, a shortage of domestic labor, the need for more investment in technology and infrastructure amid a transition to greener energy sources, and a potential change in inflation expectations could force all inflation to rise. How these forces interact with past disinflationaries remains to be seen, Daly said.

“We don’t know what the trend is,” Daly said. “But we know that, as we continue to dissect the ongoing conversion of inflation, we need to work to collect data and research that illuminates the likely path forward.”

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