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FED: Daly: Gradual Doesn't Mean As Much As You Might Think

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Daly: Bernanke introduced the idea of gradualism to me in 2003. When you’re less certain about where your destination will be then you take a more gradual approach to rate changes. We spend most of our time in an uncertainty space so it naturally implies the language you’ve been hearing about the gradual rate of cuts, which doesn’t mean as much as you might think. 

If you look at the SEP from September, medians were for one or two additional rate cuts for the rest of the year. That was aligned with inflation gradually falling and the labor market staying at this sustainable pace. She repeats that one or two cuts would be a reasonable thing to do. If inflation stays stickier or shows little sign of coming down or the labor market doesn’t look like its settling at that sustainable pace, then you can do fewer. Alternatively, if the labor market falters a little more than it has been or inflation comes down more rapidly than we projected then you can do faster cuts. The clear direction of change is down but the question is what's the pace. The 50bp cut in September was "right-sizing" as we'd been patient for the inflation data to really make it clear that it was on a sustainable path. 

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Daly: Bernanke introduced the idea of gradualism to me in 2003. When you’re less certain about where your destination will be then you take a more gradual approach to rate changes. We spend most of our time in an uncertainty space so it naturally implies the language you’ve been hearing about the gradual rate of cuts, which doesn’t mean as much as you might think. 

If you look at the SEP from September, medians were for one or two additional rate cuts for the rest of the year. That was aligned with inflation gradually falling and the labor market staying at this sustainable pace. She repeats that one or two cuts would be a reasonable thing to do. If inflation stays stickier or shows little sign of coming down or the labor market doesn’t look like its settling at that sustainable pace, then you can do fewer. Alternatively, if the labor market falters a little more than it has been or inflation comes down more rapidly than we projected then you can do faster cuts. The clear direction of change is down but the question is what's the pace. The 50bp cut in September was "right-sizing" as we'd been patient for the inflation data to really make it clear that it was on a sustainable path.