MNI: Daly Sees Neutral Fed Rate By Yearend, Smooth Rise Best

San Francisco Federal Reserve President Mary Daly sees interest rates reaching a neutral level of 2.5% by yearend before policymakers reassess what to do next, and said a smooth tightening path is the best way to avoid the risk of a recession while heading off entrenched inflation.

"I see an expeditious march to neutral by the end of the year as a prudent path," she said Wednesday in the text of a speech. "Once accommodation is removed, we need to evaluate the effects—observe how financial conditions adjust, how much inflation recedes, and what more remains to be done to ensure a sustained expansion."

"If we slam the brakes on the economy by adjusting rates too quickly or too much, we risk forcing unnecessary adjustments by businesses and households, potentially tipping the economy into recession," Daly said. "A smooth and methodical approach to policy will alert us to hazards along the way, prepare us for unexpected bumps in the road, and ultimately keep us moving forward—not just to our immediate destination, but to all of the destinations that follow."

The dangers of prolonged inflation and entrenched expectations for more remain different than the painful 1970s experience, she said. "This is a history no one wants to repeat. And it’s why the Fed is taking actions today, far earlier than in the 1970s, to tighten policy, rebalance demand and supply, and ensure that both of our dual mandate goals are achieved," she said.

"We can’t be complacent. The longer realized inflation remains high, the more risk there is that rising prices will become part of public psychology. And once psychology shifts, it is hard to bring it back."