MNI: Fed's Daly-Economy Could Keep Slowing Without More Hikes

With credit tightening underway, the U.S. economy could slow enough to bring down inflation without the Federal Reserve lifting interest rates further, San Francisco Fed President Mary Daly said Wednesday.

However, it's uncertain how much credit tightening will ultimately occur, and policymakers should also be open to raising rates further if data argue for doing so, she said.

"Looking ahead, there are good reasons to think that policy may have to tighten more to bring inflation down. But there are also good reasons to think that the economy may continue to slow, even without additional policy adjustments," she said in remarks prepared for the Salt Lake City Chamber.

The Fed has taken its benchmark fed funds rate from just above zero to just under 5% in a year, but inflation remains at 5%, more than double the Fed's target.

"While the full impact of this policy tightening is still making its way through the system, the strength of the economy and the elevated readings on inflation suggest that there is more work to do."

CREDIT TIGHTENING

Credit standards have risen over the past year and are expected to increase further in coming quarters after the collapse of two midsize banks, Daly noted, citing recent data showing declines in lending volumes in several sectors.

"Tighter credit conditions translate into less spending and investment by households and businesses, resulting in a slower pace of economic growth. So we will need to monitor this impact carefully as we determine our own policy path," she said.

Global headwinds also bear watching, she added.

"Global monetary policy tightening, international bank conditions, and greater fiscal restraint abroad all translate into slower global growth. This serves as a headwind to U.S. growth and could also help temper commodity and goods price inflation."