MNI INTERVIEW2 (RPT): QT Should Be Background -Daly

(Repeats story first published on Feb. 10 to additional subscribers)

San Francisco Federal Reserve President Mary Daly told MNI Thursday the major focus of monetary policy tightening should be interest rates rather than balance sheet runoff, which is a blunt tool that can't be used for fine-tuning.

“We know it's an important tool but it is a background tool,” Daly said in a phone interview. The Fed could raise rates three time this year and start slimming the balance sheet, she said.

“Reducing the balance sheet, that's just less clear the impact it directly has on financial markets, how much does it tighten them," Daly said. "And so fiddling with it in a surgical way is not optimal when you're thinking about trying to achieve this soft landing with the economy.”

The last time the Fed wound down in 2017, officials allowed assets to run off at USD10 billion a month, increasing the pace to USD50 billion a month over the course of a year. Atlanta Fed President Raphael Bostic has come out as the most hawkish, calling for a monthly reduction of USD100 billion. Fed officials are coalescing around a gradualist, highly telegraphed approach to reducing its USD8.7 trillion balance sheet, ex-officials and staffers have told MNI.

“We've committed to have the funds rate be our primary tool, have the balance sheet support full employment and price stability, and have it be reduced in a predictable fashion so that once we've made the plans, we're not going to be using it as some surgical adjustment tool. We have much less experience with the balance sheet.”

JOB IS 'NEVER POPULAR'

The ultimate size of the balance sheet needs to remain consistent with the “ample reserves” policy rather than returning to where it was before the pandemic, she said.

“Our balance sheet is very large. We're very far from the end place, the landing place. So, 100% of my attention on the balance sheet right now was expressed I think very well in those principles that we released” at the last decision, she said.

Daly has led the San Francisco Fed since October 2018 and has been with the Fed since 1996, meaning most of her tenure in the lead job has been through the pandemic.

"What I've learned is that it's never popular to be a central banker!” she said, laughing. “People always, sitting on the outside, especially if you are thinking about theoretical models or whatever, have a view that if you only did it this other way, everything would be better.”

“We had no playbook” for Covid, she said, and policy makers acted to “get as many people over this, through this, as whole, as complete as they can be.”

“I feel like we’ve done that, and I’m proud of that,” she said. “We have a robust economy” that has shown great resilience, she said. “If history judges us that we could have done less and still squeezed by, then I would rather be in that history book than the one that said we could have done more and more people would have been whole.”