–Wants More ‘Clarity” Before Adjusting Taper Pace, Funds Rate
–Moved Liftoff Date From 2024 to 2023; Not Sure About 2022 Given Delta
–Data Too ‘Cloudy’; Tightening Policy Further Could Be ‘Costly,’’Mistake’
By Steven K. Beckner
(MaceNews) – San Francisco Federal Reserve Bank President Mary Daly called Tuesday for “patience” and urged the Fed to await greater “clarity” on inflation and unemployment before taking further steps to retract further the aggressive monetary stimulus it has been providing for the last 20 months.
Daly, a 2021 voting member of the Fed’s policy making Federal Open Market Committee, warned raising interest rates preemptively to counter inflation would have a harmful, lagged impact on the economy without correcting Covid-related forces that she said are driving up prices and wages.
But the Fed is “well-positioned” to act if inflationary fails to “moderate” as she expects, she told the Commonwealth Club of California.
She said she has already moved her projected “liftoff” date for raising the federal funds rate from 2024 to 2023, but is uncertain about whether the FOMC should start lifting the funds rate, despite soaring inflation, because of uncertainty about how the Delta variant of the covid virus will affect the economic outlook.
In particular, Daly told reporters she doesn’t want to impede the return of 4 to 6 million people to the labor force and so is “watching and waiting vigilantly” to see how both employment and inflation respond.
Daly was part of a unanimous Nov. 3 FOMC vote to start trimming Fed bond buying by $15 billion per month until the asset purchase program ends. The FOMC said it is prepared to adjust the pace of purchases, and although Chairman Jerome Powell said tapering is apt to conclude by the middle of next year, there is speculation tapering will need to be accelerated to contain inflation.
The FOMC left the federal funds rate in a zero to 25 basis point target range and said it expects it to remain there “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.” Half of FOMC participants projected at least one rate hike next year at their September meeting.
Powell told reporters following the meeting that the Fed could afford to be “patient” and wait for the economy to “heal” before raising the funds rate. Since then, however, inflation worries have intensified after the Consumer Price Index was reported up 0.9% in October – 6.2% from a year earlier and the fifth straight month of gains in excess of 5%. The CPI leap prompted increases in inflation expectations and caused Fed watchers to anticipate a quicker pace of tapering and/or funds rate hikes.
But Daly, considered one of the more “dovish” Fed presidents, is sanguine, maintaining “there are good reasons to think” elevated inflation won’t persist.
Attributing wage-price pressures to a combination of resurgent consumer demand and supply constraints, she said, “I expect a moderation in price pressures as the pandemic recedes.”
“Similarly, as fiscal support rolls off and many households move their savings back to historically normal levels, demand will likely become more in sync with the overall strength of the economy,” she said in prepared remarks. “Production and supply chains should also catch up and repair, reducing bottlenecks and easing the pressure on prices.”
“As these things happen, we should return to the typical dynamics that drive the economy,” she added.
Daly also predicted a return to more normal labor market conditions. “As COVID recedes, I expect people to settle in, land a job they want, and return to the labor market to support their
families and build a career….It’s too early to count out the millions of people sitting on the sidelines.”
Daly acknowledged concerns that rising prices could get embedded in household and business expectations and create “a vicious wage-price spiral that would end well for no one.” But she said, “So far, there is little evidence that this is happening now.”
So she suggested the FOMC needs be in no rush to counter wage-price pressures. Indeed, firming policy too soon could backfire, she contended.
“Monetary policy is a blunt tool that acts with a considerable lag,” she said. “So, raising interest rates today would do little to increase production, fix supply chains, or stop consumers from spending more on goods than on services. But it would curb demand 12 to 18 months from now.”
“Should current high inflation readings and worker shortages turn out to be COVID-related and transitory, higher interest rates would bridle growth, slow recovery in the labor market and
unnecessarily sideline millions of workers,” she continued.
Given those considerations, Daly said she “come(s) down on the side of waiting to gain greater clarity.”
“The Fed is well positioned to act should inflation begin to look more persistent,” she continued. “It’s much harder to unwind a preemptive action that turns out to be wrong.”
Daly stipulated that “’not now’ does not mean ‘not ever,’” and she noted that the FOMC is “already starting to adjust policy to recognize the strength of the economy” by taper bond purchases.
“The tapering of purchases over the next eight months gradually slows the amount of support we are adding to the economy, allowing it to function more on its own,” she said, adding that tapering gives the FOMC time to decide what its next step should be.
“Over the next several quarters, as tapering occurs, we will watch how the economy does and see whether inflation eases and workers come back,” she said. “As we get a clearer signal, we will be ready to act accordingly, continuing to provide or remove support as needed to ensure the economy settles at a sustainable place.”
Daly suggested “bold action” would be foolhardy. “While it’s easy to mistake motion for competence or action for attention, running headlong into a fog can be costly.”
“So in the face of unprecedented uncertainty, the best policy is recognizing the need to wait,” she said. “Although this can be hard, in the end, patience is the boldest action we can take.”
Asked about her preferred timing for funds rate liftoff, Daly said that some time ago she had moved her “dot” from 2024 to 2023, and she said that if it hadn’t been for the Delta variant she might well be projecting a 2022 liftoff.
“I absolutely have pulled my rate ajdustment forward,” she said, but said she’s not ready to diclose what “dot” date she will put in here projections for the December FOMC meeting.
Daly said she and her colleagues are “thinking hard about the most likely outcome for the economy … and whether we need liftoff in 2022, to make sure inflation doesn’t become more persistent … or whether it would be sufficient to lift off in 2023 and allow labor market to heal” more.
However, she told reporters she’s undecided about that until it becomes clear how soon the economy will shake off Delta and what impact the vaccination of children will have.
Talking to reporters following her speech, Daly conceded that inflation is both high and painful, and she said she “expect high inflation to extend at least through the first half of next year,” but she said the FOMC cannot focus solely on inflation because it also has a “dual mandate” to achieve maximum employment, and she echoed Powell in saying the Fed must allow the economy to “heal” and return closer to that objective.
“I’m not in favor of delaying (liftoff) forever,” she said. “It’s just premature to do that right now.”
“Watching and hoping is my strategy right now,” she went on, adding that “premature action has costs.”
Daly emphasized that “there’s a differnence between normalizing and lifting off.”
“We would still be acommodative (after liftoff),” she continued, but then the FOMC would need to “evauate how soon we get back to a neutral rate.”
“I don’t think the calculation is how long can we afford to wait…,” she said. “We’ve just come off delta…(If not) we would be thinking about lifting off, but that’s not where we are, we did have delta.”
For now, she said the focus must be on tapering.
Although the FOMC said it would be prepared to adjust the pace of tapering, Daly said she has “a strong bias” to keep the pace the same as announced “unless there is something significant to move one way or the other.”
Agreeing with Powell, she said, “We have to think about both sides of the mandate.. (and) give the economy a chance to heal.. That’s why I’m in watching and waiting vigilantly …that’s my mindset right now.”
Responding earlier to audience questions, Daly said one reason why she is hesitant to tighten monetary policy to counter inflation is that, with so many people having left the labor force, she does not want to “lock away that potential (for employment) before they’re ready to come back.”
“We want to run sustained expansion so people have the opportunity to participate,” she added.
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Contact this reporter: steve@macenews.com
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