Fed’s Daly Is Prepared to Back Another 0.75 Percentage Point Rate Hike
Interest rates need to rise to levels slowing economic growth and combating inflation, San Francisco Fed president says
A Federal Reserve official said the central bank needs to raise interest rates to levels designed to slow economic growth and combat inflation, and that those levels will depend on factors outside of the Fed’s control.
San Francisco Fed President Mary Daly said Friday she was prepared to support another rate increase of 0.75 percentage point at the central bank’s next meeting, on July 26-27, to counter inflation, which is at a 40-year high. Several other Fed officials endorsed such a move over the past week.
Officials last week raised the central bank’s benchmark federal-funds rate by 0.75 percentage point, or 75 basis points, the largest increase since 1994, to a range between 1.5% and 1.75%. They projected the rate would need to rise at least to 3% this year.
Ms. Daly told reporters that she thinks a neutral level for the fed-funds rate that neither spurs nor slows the economy is around 3.1%. “We need to move expeditiously to get there,” she said. A rate increase of 75 basis points “seems like a very good place to go,” given the current economic outlook.
The fed-funds rate influences the cost of loans across the economy. Ms. Daly said she would be open to a smaller, half percentage point rate rise at the July meeting if borrowing costs were to climb more sharply or the economy were to slow more broadly than she currently expects.
Ms. Daly said her 3.1% estimate for the neutral rate is somewhat higher than the 2.5% rate that she estimated would be expected if inflation were at the Fed’s 2% target.
The 0.75-point rate increase the Fed announced on June 15 marked an abrupt change from unusually precise guidance delivered in the run-up to that meeting by most officials, who had indicated they favored a smaller, half-point rise. Ms. Daly supported the larger increase because recent inflation data had suggested “we weren’t making much progress…. We’re not getting traction on inflation in a way that I had hoped,” she told reporters.
In a speech earlier Friday, Ms. Daly said how high the Fed ultimately raises rates will depend on developments including the speed and degree of supply-chain improvements and the duration of the war in Ukraine, which has driven up prices for energy, food and other commodities.
Ms. Daly said the central bank needed to slow the economy to bring inflation down in the midst of rising imbalances between supply and demand. The Fed’s rate increases can reduce demand by raising the costs to invest and hire and by slowing the pace of income growth.
“If supply continues to fall short and inflation remains high, we will need to do more,” said Ms. Daly in her speech at a conference in Orange, Calif. “If conditions improve and supply bounces back, we can do less.”
Ms. Daly said she expected job growth to slow and the unemployment rate to rise from its currently low levels. “Regardless of which path we take, there will likely be some slowing in the economy; that’s how monetary policy works,” she said. “I do expect the costs of adjustment to be moderate.”
Ms. Daly said she was optimistic that the central bank’s efforts to combat inflation would closely follow a precedent set in the mid-1990s, when the Fed raised interest rates by 3 percentage points over a year and the economy continued to expand in a so-called soft landing that avoided a recession. That contrasted with the experience in the 1970s, when the central bank failed to tame price pressures known as the Great Inflation.
“Many of the factors that helped fuel the Great Inflation are not as prominent today,” said Ms. Daly, including widespread wage indexation.
Earlier Friday, St. Louis Fed President James Bullard said he didn’t see significant near-term risks of a recession. “I think it’s a little early to have this debate about recession probabilities in the U.S.,” he said during a panel discussion with central bankers in Zurich.
“If you’re looking for a recession in the U.S., you’re probably not seeing it in” consumer-spending growth, said Mr. Bullard. “You could always be hit by a shock—it’s certainly possible—but no, I don’t think that [a recession] is a great prediction for right now.”