The Fed’s Daly says US interest rates are likely to be higher for longer

Federal Reserve officials are converging on the need to keep US interest rates higher for longer, reflecting concern about recent higher-than-expected inflation data and concerns about global economic trends that could fuel price pressures.

“In order to put this episode of hyperinflation behind us, it will likely be necessary to tighten policy further, and to maintain it for a longer period,” Mary Daly, President of the Federal Reserve Bank of San Francisco, said Saturday in remarks at Princeton University. Restoring price stability is our mission and it is what the American people expect. Therefore, the FOMC remains determined to achieve this goal.

Daly’s remarks follow a series of optimistic comments from other senior US central bank officials, in response to economic indicators showing that US inflation is not declining as quickly as hoped. The US job market also remains remarkably strong.

It comes ahead of a pivotal month for Fed policy and economic data. Next week, Jay Powell, chair of the Federal Reserve, will testify before Congress in comments that will set the stage for the Fed’s highly anticipated policy meeting on March 21-22, including new economic and interest rate projections.

In between, new data on inflation and the US jobs market could determine whether the Fed goes ahead with a new 25 basis point interest rate increase, as has long been expected, or is forced to be more aggressive and raise rates. interest at 50 basis. points.

“I think my colleagues would agree with me that the risk of underextending is greater than the risk of overexertion,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said this week at an event in South Dakota. He added that he was “open-minded” about raising interest rates by 25 or 50 basis points at the next meeting.

“Recent data suggests that consumer spending is not slowing that much, that the labor market remains unsustainably hot, and that inflation is not declining as quickly as I would have thought,” Fed Governor Christopher Waller said Thursday.

Waller added that he hoped future data would show signs of “moderation” and “progress” on the Fed’s goal of cooling the economy, but that “wishful thinking is no substitute for hard evidence, in the form of economic data” and “we can’t risk an inflation rebound.”

In her Princeton speech, Daley raised the possibility that a number of structural factors in the United States and global economies have shifted in recent years to create a more bloated environment in a post-pandemic world.

Over the past decades, a combination of globalization and technological changes have kept prices and wages low, as policymakers have struggled to boost employment and raise inflation to the Fed’s preferred target of 2 percent.

But Daly noted that this was changing. One trend to watch, she said, is the decline in “global price competition”. Another was the “domestic worker shortage,” with fewer Americans seeking work and immigration still weak. The third is the transition to a “greener economy, which will require investment in new operations and infrastructure,” as companies look to pass costs on to consumers. Daly also warned of the risk that inflation expectations, which had been kept under control, might start to rise as well.

“If the old dynamics are eclipsed by newer influences and pressures on inflation start to rise rather than fall, it is likely that policy needs to do more,” she said.

Speaking to reporters after the speech, Daley said it was too early to discuss the details of any policy adjustment at the next meeting, saying she would look for “additional information” from the data.