Fed’s Daly says US rates should be higher for longer

Federal Reserve officials are converging on the need to keep U.S. interest rates high for longer, reflecting worries about higher-than-expected inflation data recently and worries about global economic trends that could fueling price pressures.

“In order to put this episode of high inflation behind us, further policy tightening, sustained for longer, will likely be required,” San Francisco Fed Chair Mary Daly said in a speech at the University of San Francisco on Saturday. Princeton. “Restoring price stability is our mandate and it is what the American people want. Thus, the FOMC remains committed to achieving this goal,” she added.

Daly’s remarks follow a series of hawkish comments from other senior US central bank officials, reacting to economic indicators showing that US inflation is not falling as quickly as hoped. The US labor market also remains remarkably strong.

They precede a pivotal month for Fed policy and economic data. Next week, Jay Powell, the Fed Chairman, will testify before Congress in comments that will set the stage for a highly anticipated Fed policy meeting on March 21-22, including new economic projections and forecasts. interest rate.

Meanwhile, new data on inflation and the US labor market could determine whether the Fed goes ahead with another 25 basis point interest rate hike, as expected. for a long time, or if it is forced to be more aggressive and raise interest rates by 50 basis points. points.

“I think my colleagues agree with me that the risk of under-tightening is greater than the risk of over-tightening,” Minneapolis Fed President Neel Kashkari said this week at an event in South Dakota. He added that he was “open-minded” about whether to raise rates by 25 or 50 basis points at the next meeting.

Fed Governor Christopher Waller said on Thursday that “recent data suggests consumer spending isn’t slowing all that much, the labor market is still performing unsustainably, and inflation isn’t falling as fast. than I thought”.

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

In his Princeton speech, Daly raised the possibility that a number of structural factors in the US and global economies may have changed in recent years to create a much more inflationary environment in the post-pandemic world.

Over the past few decades, the combination of globalization and technological change has kept prices and wages low as policymakers strive to boost employment and drive inflation up to the target of 2% preferred by the Fed.

But Daly suggested that was changing. She said one trend to watch was a decline in “global price competition”. Another was the “national labor shortage” as fewer Americans seek work and immigration remains subdued. A third was the transition to a “greener economy, which will require investment in new processes and infrastructure”, with companies seeking to pass the costs on to consumers. Daly also warned of the danger that inflation expectations, which have remained in check, could also start to rise.

“If the old dynamics are overshadowed by other more recent influences and inflation pressures start to rise instead of fall, then policy will likely need to do more,” she said.

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