Nov 21, 2022
Fed Should Be Mindful of Lags as It Tightens Rates Further, Daly Says
, Bloomberg News
(Bloomberg) -- San Francisco Fed President Mary Daly said that officials will need to be mindful of the lags with which monetary policy works, while repeating that she sees interest rates rising to at least 5%.
“As we work to bring policy to a sufficiently restrictive stance -- the level required to bring inflation down and restore price stability -- we will need to be mindful,” Daly told the Orange County Business Council on Monday in Irvine, California. “Adjusting too little will leave inflation too high. Adjusting too much could lead to an unnecessarily painful downturn.”
Policymakers have raised the Fed’s benchmark interest rate from near zero to a target range of 3.75% to 4% this year, including four back-to-back 75 basis-point hikes, the most aggressive tightening campaign since the early 1980s.
Investors expect the Fed to moderate the pace of rate hikes to 50 basis points when officials gather Dec. 13-14.
Daly told reporters after the speech that she would be entering the meeting with the full range of rate-hike options on the table, while repeating that she sees rates peaking at least as high as 5%.
“I tend to be on the more hawkish side of the distribution, if you will, as I think about what needs to be done here and where the risks lie,” she said on a telephone conference call. “5% to me is a good starting point,” she said, adding that it could go high if needed.
In her prepared remarks, Daly said the Fed’s ongoing reduction of its balance sheet and the forward guidance officials are providing about the future path of policy also work as tightening mechanisms, which is being reflected in financial conditions.
“While the funds rate is between 3.75 and 4%, financial markets are acting like it is around 6%,” she said.
“As we make decisions about further rate adjustments, it will be important to remain conscious of this gap between the federal funds rate and the tightening in financial markets,” Daly said. “Ignoring it raises the chances of tightening too much.”
(Updates with Daly comments to reporters)
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