Takako Hatayama-Phillips
San Francisco Fed President Mary Daly kept a hawkish tone while speaking to reporters after a speech she gave Saturday at Princeton University. Until she has full confidence that the U.S. economy is heading toward 2% inflation in a reasonable amount of time, “I will continue to support tightening,” she said.
With January’s jobs report and inflation data coming in hotter than expected, she’s keeping a close eye on the next round of data to see if that comes in higher than expected. As such, “it’s really too early to discuss the specifics of the next policy adjustment,” she said.
The Fed policymakers’ December summary of economy projections put the range of the terminal policy rate at between 5 and 5.5% (compared with the current rate of 4.50%-4.75%). A continuation of the January trends would have her lean toward more tightening, she said.
How high interest rates will need to get and how long they’ll need to stay there will depend on how the data develops. On Friday, the market had priced in a 71.6% probability of a 25 basis point rate hike at the Fed’s March 21-22 meeting, down from the 97.4% probability a month earlier. Meanwhile, the probability of a 50-bp hike increased to 28.4% vs. 0% a month earlier, according to the CME FedWatch tool.
She sees a decent chance that the Fed can bring down demand and inflation without a recession. “My modal outlook is for the labor market to cool,” Daly said. Currently, jobs are being added at rate that higher than is sustainable. Under such a scenario, the unemployment rate “will go up a little” and “below trend growth for GDP” would provide “a smooth transition to a sustainable economy.”
If there’s a trend of reaccelerating in a tighter labor market, that would indicate the policy isn’t tight enough, and would mean rates would have to go higher, she said.
Some of the feedback she’s getting from businesses in her district point to progress in the right direction. “What we’re hearing is that it is easier to find workers, but it’s still hard to find workers,” Daly said. Furthermore, the firms are seeing more interest when they post a vacancy, but it still takes a long time to fill the opening.
She also is seeing wage increases that firms are offering are lower than they were a year ago. That points to a “positive direction in wage growth and hiring, but the level remains too high,” she said.
Another positive sign is firms are starting to get forward contracts and able to lock in pricing. That indicates Inflation expectations are starting to come back down, she said.
Earlier, Daly said the Fed needs to tighten more as disinflation is far from certain.
