MNI INTERVIEW1: Fed's Daly Sees Little Case For Shifting QE

San Francisco Federal Reserve President Mary Daly told MNI Tuesday there's no strong case to shift the pace or mix of the Fed's asset purchases, given success calming markets and holding down borrowing costs and the need to guard against the murky outlook created by Covid.

"The reason we did QE and Operation Twist in the previous crisis, the financial crisis, was because the long end of the yield curve was out of whack with what we wanted rates to be over time, and it's not in that position right now," Daly said in an interview. "Right now, the long end of rates are pretty low."

The Fed's initial pandemic-era purchases were "decidedly not QE" as they were intended to stabilize markets. That worked, but "we aren't out of the woods in terms of shocks to the economy, with the increasing Covid cases in parts of the world," she said. "In my judgment we're still providing important backstops."

The Fed has cut interest rates to just above zero, bought trillions of dollars of assets to carry the economy through the Covid pandemic and signaled no change in its policy interest rate for several years. It has also introduced a new strategy seeking average inflation of 2% while closing a shortfall from full employment, and Daly said she's "completely supportive" of the Fed's guidance including a modest inflation overshoot that some investors find too vague.

"That desire for specificity is just a desire in my opinion for more of a rule-based policy, which I think wouldn't be the correct policy," Daly said. The moderate overshoot would come against a decade-long trend rate of inflation in the 1.7%-1.9% range, she said. Daly likened the inflation strategy to a person seeking a target weight and tolerating some range around that goal, adding policy makers must quash any perception the 2% target is a ceiling.

ROOM TO RUN

The recovery needs more fiscal support and will slow without it, she said, declining to give a specific prediction of the lost potential. On the bright side, the yield curve is in a good place to support the economy through low rates on mortgage and auto loans, helping ease some of potential hit from a lack of further fiscal stimulus, Daly said. "The Fed can't do this by itself," she said.

The economy remains mixed even with several months of some good data, she said. There is "a lot of room to run" to meet the Fed's full employment goal and test how far things can go to re-integrate laid-off workers and help set conditions to tackle racial disparities in the job market, she said.

"You see home prices going up, consumer spending returning to pre-Covid levels, these are all things that are really good signs, they give us some confidence that momentum that we had prior to Covid" remains, she said. "A few months of positive data are far from bringing us out of the hole that we have to come out of because of Covid."

While California was one of the slowest regions to emerge from health restrictions, business contacts report people returning to stores and jobs while showing good mask wearing practices, she said. "My contacts are pleased about that of course, but they also caution us and me about getting too excited, because the hole is big," she said. "Their willingness to sort of go out and invest as if we're back into a full-blown expansion, that's just not there yet."

Daly joins the FOMC as a voter next year, and has led the San Francisco Fed since October 2018.