MNI: Fed's Daly Says Against Preemptive Rate Hikes

The Federal Reserve should gain more clarity about the inflation outlook before raising interest rates rather than acting preemptively on fears around lasting price pressures, San Francisco Fed President Mary Daly said Tuesday.

"I come down on the side of waiting to gain greater clarity," Daly said in prepared remarks for the Commonwealth Club of California. "The Fed is well positioned to act should inflation begin to look more persistent. It's much harder to unwind a preemptive action that turns out to be wrong."

Fed officials are coming under increasing pressure to raise official borrowing costs as inflation has proven less transitory -- and substantially higher -- than policymakers had anticipated. U.S. consumer prices surged 6.2% in the year to October.

Daly argued the recent run-up is linked to pandemic-related distortions including disruptions to the supply chain and a temporary fiscal boost to household balance sheets.

"As fiscal support rolls off and many households move their savings back to historically normal levels, demand will likely become more in sync with the overall strength of the economy. Production and supply chains should also catch up and repair, reducing bottlenecks and easing the pressure on prices."

MORE HARM THAN GOOD

MNI reported last week the Fed's December meeting is likely to show more forecasts for 2022 rate hikes, and Daly's remarks show she remains skeptical of the need for tightening.

"Raising interest rates today would do little to increase production, fix supply chains, or stop consumers from spending more on goods than on services," she said.

"But it would curb demand 12 to 18 months from now. Should current high inflation readings and worker shortages turn out to be COVID-related and transitory, higher interest rates would bridle growth, slow recovery in the labor market and unnecessarily sideline millions of workers."

Daly said the job market is still far short of its pre-pandemic strength, a goal she believes is attainable despite a slow rebound in labor force participation.

"Workers do come back. We saw this in the last expansion and in most expansions before that," she said. "In other words, it's too early to count out the millions of people sitting on the sidelines."