The Federal Reserve shouldn't rush to hike short-term interest rates to cool inflation as it adds cost to workers and the economy, San Francisco Fed President Mary Daly said Tuesday.
“Preventive measures are not free. As with any insurance, there is a cost, ”Daly said during a speech at the Commonwealth Club in San Francisco.
Interest rate hikes now would not alleviate supply chain problems, but would dampen demand in 12 to 18 months and slow the economy when millions of sideline workers are ready and able to go back to work, she said.
Daly said there were reasons to believe that high inflation will not last, even if the sharp rises came as a surprise. Consumers will turn away from spending on goods once the economy reopens, she said.
"I expect inflation to ease as the pandemic subsides," Daly said.
Fed officials disagree on how to respond to inflation, which has soared to its highest level in 30 years.
Early Tuesday, St. Louis Fed President James Bullard urged his colleagues "to take a more aggressive direction." He said acting early now would eliminate the need to hike short-term rates sharply in the future.
Another thing to be patient, Daly said, is that the outlook for the next nine months is just too uncertain for the Fed.
"While it is easy to mistake movement for competence or action for attention, it can be expensive to get caught upside down in a fog," she said.
Daly was a voting member of the Fed's Interest Committee that year. She said there was no question that the central bank had the tools to cut high inflation if necessary.
The Fed is now buying government bonds and mortgage-backed securities, but has started to slow the pace of purchases. According to the plan announced earlier this month, purchases will end next June. Daly said the Fed could watch the economy carefully while the throttling was in progress.
“Over the next few quarters, when the slowdown takes place, we'll see how the economy does and whether inflation eases and workers come back. Once we get a clearer signal, we will be ready to act accordingly and continue to provide or remove support as needed to ensure that the economy settles in a sustainable place, ”she said.
In comments to reporters following her speech, Daly cited the delta variant of COVID-19 as the main reason for patience.
“If we were where we are today and had never had the Delta variant… then I would consider taking off. But we don't have that. We had Delta, ”said Daly.
When asked about her forecast for the economy in 2022, Daly said she saw the outlook as "bullish" as the economy was on track to grow above the 2% rate that is widely viewed as the long-term trend growth rate of the economy . This will put further pressure on the unemployment rate. Inflation will decline but likely stay above the Fed's 2% target, she said.
"Whether it will be something about it or something about it, I'm not sure," she said.
The yield on the 10-year government bond
has moved up in the last few days, but remains below the 1.75% high for the year from early April.