– San Francisco Fed’s Daly Says Raise Rates To ‘Appropriate’ Level Then ‘Look Around’
By Steven K. Beckner
(MaceNews) – Federal Reserve Governor Lisa Cook expressed a strong commitment to reducing inflation Friday, pledging to support a more restrictive monetary policy until inflation is brought down.
Meanwhile, San Francisco Federal Reserve Bank President Mary Daly said she would support raising short-term interest rates until they get to an “appropriately’ restrictive level, then pausing to assess the cumulative effects of Fed rate hikes.
Cook, speaking to the National Bankers Association, said ‘high inflation has been stubbornly persistent, while the labor market has remained strong.”
“Accordingly,’ she said, “policy should remain focused on restoring price stability. With inflation running well above our 2% long-run goal that likely will require positive rate hikes…”
After raising rates to a level she did not specify, Cook said the Fed’s policymaking Federal Open Market Committee should “assess the effects of our cumulative (actions) on inflation.’
“Inflation is too hot; it must come down,” she said, adding that she and her colleagues will continue fighting inflation by cooling demand for goods and services “until the job is done.”
The two Fed officials were speaking on the heels of a worse than expected consumer price index report, showing that core prices rose a higher than expected 6.6% from a year ago last month, while the overall CPI rose 8.2%.
Cook, who took office on May 23, joined in a unanimous Sept. 22 vote by the FOMC raising the federal funds rate another 75 basis points to a target range of 3 to 3.25% – culminating 300 basis points of monetary tightening since the FOMC stopped holding the funds rate near zero in March. FOMC participants projected the funds rate rising further to a median 4.4% by the end of 2022 and to 4.6% by the end of 2023.
Meanwhile, the Fed is proceeding with shrinkage of its massive portfolio of bonds purchased through “quantitative easing” operations during the pandemic.
Daly, interviewed on Yahoo Finance, had a similar message, but like Cook was not specific about how high the funds rate needs to go, other than saying it needs to go “into the fours” or between 4% and 5%, in keeping with the September “dot plot.”
She said she is “quite sure some additional restriction” is needed “to bring GDP back to a more sustainable rate of growth.”
“People would like us to write down an exact number (for the terminal funds rate), but there is too much uncertainty” to do that, (to exactly predict the terminal rate), said Daly, adding, “we need additional rate hikes …. I’m very supportive of putting additional restriction in place.”
Daly emphasized the FOMC is “not on a preset course,’ but would be watching incoming data and the “lagged effects” of past monetary restraint.
What matters, according to Daly, is not just how high the funds rate goes, but how long the Fed keeps it there.
The FOMC will “end with a rate that’s appropriate to stop and look around,” she said, adding that it needs to first get to a rate that’s sufficiently restrictive, then “let that sit for a while.” The strategy is to “raise and hold” rates, then adjust policy settings as the data comes in as it determines “whether the economy needs more bridling or less bridling.”
“We want to make sure (inflation) doesn’t become embedded ….,” Daly said. “We’re focused on restoring price stability.”
To do that, “we need to slow GDP growth substantially to get back to supply/demand balance,” she said.
Asked about the odds of recession and about how much economic weakness she’s willing to tolerate to reduce inflation, Daly downplayed recession risks, saying that in the nine western states in her twelfth Fed district, “I’m not hearing signs of recession. I’m hearing ‘we’d like to grow more but can’t find workers.”
She said contacts in her district are telling her that “people have plenty of jobs …. people are spending .,.. inflation is the troubling thing.”
The Fed is “committed to bringing demand back into line with supply…,” she reiterated. Reducing GDP growth “substantially” will reduce inflation and “put us back into balance so we can grow at trend.”
Describing her approach to monetary policy, Cook said that in the current “uncertain” environment, “paying close attention to the data is key, which of course includes readings on inflation and the labor market, but we must be confident about our ability to draw firm conclusions and prepare for the inevitable surprises.”
“We may also consider high frequency data that more quickly capture evolving economic developments,” she said, citing such data as dining reservations.
Cook, one of the newest FOMC voters, said “uncertain times require a risk management approach to policy settings” and watching the performance of actual data, not just forecasts.
“High inflation has been stubbornly persistent, while the labor market has remained strong,” she said. “Accordingly, … going forward policy should remain focused on restoring price stability.”
Cook said the Fed needs to act now to reduce inflation so it won’t have to do more later.
While inflation is high, Cook said “the labor market is very tight,” enabling the Fed to concentrate on combating inflation to “keep a sustainably strong labor market over the longer term.”
Cook said “our (funds rate) tool is more effective on aggregate demand,” but said “we have to be aware of and look at things that come from the supply side.”
Cook also said that the Fed is “closely monitoring” financial stability risks as it raises rates. And, although the Fed’s dual mandate is domestic, it also must keep an eye on global economic developments.