The Federal ReserveFederal Reserve needs to slow the U.S. economy and take the heat out of the strong jobs market to bring down corrosive inflation, Mary Daly, San Francisco Fed chief Mary Daly said on Thursday. But it doesn't need to trigger a recession to do so.
The Fed last week delivered a third-straight 75 basis-point interest rate increase, lifting its policy rate target range to 3% -- 3.25%, and signaling rates will likely increase to 4.4% by the end of the year and 4.6% in the following months.
The last time that the Fed raised rates is now more than three times, the Fed's 2% goal was more than today, is when the U.S. central bank hasn't raised rates this sharply since the 1980s. The Fed hikes plunged the economy into two recessions, including one that was particularly deep and painful, and analysts worry that this time won't be much different.
In remarks prepared for delivery to Boise State University in Idaho, Daly said last week by Fed Chair Jerome Powell and several Fed policymakers that the economy needs to move toward a more sustainable path requires higher interest rates and a downturn in the pace of economic activity and the labor market. For now, inducing a deep recession does not seem warranted by conditions, nor is it necessary to achieve our goals. She said households and businesses haven't built an expectation for ever-higher prices into their mindset, unlike 40 years ago when inflation ran high for a decade before the Fed took decisive action.
Inflation this time around has been above the Fed's target for about a year and a half.
The Fed can't take well-anchored inflation expectations for granted, as Daly said, the longer inflation stays high, the more likely it will undermine Americans' confidence in the Fed's ability to bring it down. That could cause the central bank to take the kind of dramatic action it did in the 1980s - jacking rates well into the double digits and plunging the economy into a tailspin.
There are risks to a soft landing for the economy, as well as ongoing COVID battles, the war in Ukraine, a recession ahead for Europe, and central banks tightening policy, according to Daly.
She said that the path for a smooth landing was narrowed due to the risks, along with persistent supply chain issues, robust consumer spending, and a strong labor market marked by low 3.7% unemployment. Daly made a lot of her speech by laying out how damaging inflation is to households and businesses and arguing that slowing the labor market is better for Americans in the long run.
She said the Fed will need to pay close attention to the economic data so it doesn't do too much or too little. She said the costs of errors are high and that the costs of errors are high.