MNI POLICY: Daly Says Stronger Fed Guidance Needed Eventually

San Francisco Fed President Mary Daly said Wednesday it's a matter of time before stronger forward guidance will be needed that ties interest rates to economic outcomes, while for now monetary policy has created clear expectations that help sustain the economy through the choppy path out of the pandemic.

"There may come a time and likely will come a time when additional forward guidance will be needed, and I would be very supportive of that," Daly, an FOMC voter next year, told reporters in response to question on whether such a change would come as part of the longer-term framework review.

"I see that clarity in particular tying it like we have in the past to outcomes, is really critical," she said. "Right now, I think it's pretty clear and so you don't need to have that additional bit, but there will probably come a time when that additional clarity is required."

Creating stronger guidance on rates doesn't mean the Fed needs to deliver the same thing for QE, Daly said, calling them separate decisions for the committee to make. "I don't see that if you tie one you have to tie the other; I don't see those as necessarily the same decisions at all," she said. "You take the tool, and then you see if the tool is clear, if it's not you give it additional oomph by giving it more clarity, and if it is then you're OK."

The weak economy will likely create a run-up in bankruptcies that show up in the banking system, an effect that has been blunted by forbearance agreements, Daly told reporters. "It's a matter of time really before you start to hear about that in the financial sector."

Wiggly Toe Recovery

In an earlier webcast with the Economic Club of Las Vegas, Daly said: "We don't yet have Covid-19 under control, that will shade how fast we come back." She also said the recovery no longer looks like a V but instead "is going to be a W, with a little bit of a wiggly toe at the end."

"It's going to be fits and starts" but "overall slow, and gradual" and dictated by the virus, Daly said. She added in the media Q&A that there are already signs that the slowdown or reversal of Covid re-openings is slowing down foot traffic in stores and the job market.

Benefits brought in by Congress have been a major positive offsetting the Covid demand shock, and there is "very little" evidence the jobless top-up checks have deterred people from returning to work, she said. The economy faces a bit of a "fiscal cliff" from the lack of another major Congressional package, Daly said.