MNI POLICY: Fed's Daly: Need to Watch Lower Infl Expectations

By Jean Yung

     WASHINGTON (MNI) - Signs that inflation expectations are drifting lower

bear close watching as it both raises the risk of deflation and hurts the Fed's

credibility, Federal Reserve Bank of San Francisco President Mary Daly said

Tuesday. 

     "While there is no sign today that the anchor has drifted down

significantly, we are seeing signs that inflation expectations are edging

lower," she said in remarks prepared for a business group in San Francisco. 

     "We need to be vigilant on this front, and work to deliver 2 percent

inflation on a sustained basis. The Federal Reserve's continued credibility with

consumers and businesses depends on it." 

     The Fed has yet to meet its 2% inflation target on a sustained basis, she

said. Too-low inflation makes the chance of deflation more likely and that

"makes it harder for the Fed to adjust interest rates in the face of economic

shocks," she said.  

     Despite her expectations for a very robust job market and healthy growth at

around 2% this year, inflation remains "muted," she said. One reason that the

linkage between economic activity and inflation has weakened is that employees

are demanding alternate forms compensation not captured in wage measures. 

     Workers are also losing bargaining power due to a decline in unionization,

while firms are losing pricing power amid globalization, she said. 

     Further, the Fed's firm commitment to its inflation target over the past

decades, while it "keeps inflation from plummeting when the economy is weak,"

also keeps "a lid on inflation when the economy is strong." 

     Daly does not vote on rates this year. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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