MNI: Daly Says The Fed Can Engineer A Soft Landing

San Francisco Fed President Mary Daly said Friday policymakers can get inflation back under control while avoiding an economic slump, pointing to the successful 1990s tightening cycle of 3 percentage points in a year as a better example than the tougher tradeoffs of the 1970s.

"Bringing inflation down is the Federal Reserve’s number one priority right now. And we have the tools and the will to do it," she said in prepared remarks. "But we actually want to do more than that. We want to bring inflation down without crippling growth and stalling the labor market."

The speech didn’t lay out specifics on whether another 75bp rate increase is needed at the next meeting or where the fed funds rate moves later this year, underlining that policymakers must remain nimble to further economic shifts. The Fed's key rate has climbed 150bps this year to a range of 1.5%-1.75%, so mirroring the 1990s cycle she referenced would mean another 150bps over the remaining four meetings in 2022.

The 75bp rate hike last week "puts policy on an expeditious path to neutral by the end of the year. After that, I see additional tightening beyond neutral as the likely next step," she said.

"If supply continues to fall short and inflation remains high, we will need to do more. If conditions improve and supply bounces back, we can do less," Daly said.

"Regardless of which path we take, there will likely be some slowing in the economy," she said. "I do expect the costs of adjustment to be moderate, with some slowing of GDP growth below its longer-run trend and an increase in the unemployment rate from the very low levels we see today."

Other Fed officials like Chair Jerome Powell and leaders of the St. Louis and Chicago Fed have also downplayed the risk of a U.S. recession, pointing to strong growth momentum and record job vacancies. Former Fed officials have said the Fed is likely to deliver at least one more 75bp rate increase to ensure inflation moves back towards 2%.

Much of Daly’s remarks reviewed why the Fed delayed tightening as the economy lurched out of the depths of the pandemic, citing concern monetary policy would have a harder time if growth stalled again with interest rates already around zero. Daly also argued higher market yields are amplifying the Fed’s tightening to date.