MNI: Fed Can Tame Inflation Without Deep Recession, Daly Says

The Federal Reserve still has time to bring inflation under control without triggering a deep recession, San Francisco President Mary Daly said Thursday, comments that go further in explaining that a period of weakened growth and job creation will be the price of tightening.

"Navigating the economy toward a more sustainable path necessitates higher interest rates and a downshift in the pace of economic activity and the labor market," she said in the text of a speech at Boise State University. "But for now, inducing a deep recession does not seem warranted by conditions, nor is it necessary to achieve our goals."

The Fed managed in the 1990s to raise interest rates without also delivering a recession, Daly said. The job is harder this time because of “impending recession in Europe" and global shocks like the Ukraine war, she said.

"These risks, combined with stubbornly persistent supply chain issues, ongoing strength in the labor market, and robust consumer spending, narrow the path for a smooth landing. But they do not close it," Daly said. Her remarks didn't give a specific view of whether another 75bp rate hike is needed at the next meeting, or comment on recent U.K. market volatility.

THAT TIME WAS DIFFERENT

The severe recession of the 1980s came under very different circumstances, Daly said. Back then inflation had been elevated for a long time and required the Fed to engineer a major reset of expectations, she said, which isn't the case at the moment.

"So far, inflation psychology has not been lost and the public continues to believe the Fed has the tools and the resolve to restore price stability. But we cannot take this for granted," Daly said.

While employment may lag for a while, rapid inflation is also corrosive to the well-being of workers and the economy, she said. That means a balance in tightening monetary policy is still required.

"Too little could allow inflation expectations to drift, requiring even more difficult policy actions in the future," she said. "And too much could end in overtightening and an unnecessary and painful downturn."