Federal Reserve Bank of San Francisco President Mary Daly said policymakers should raise interest rates higher and keep rates higher for longer.
“It’s clear that there is more work to be done,” Daly said Friday in prepared remarks for a speech at Princeton University in New Jersey. “To put an end to this episode of high inflation, further policy tightening, maintained for longer, will be needed.”
Daly said inflation remains high in every sector – goods, housing and other services – and the bumpy nature of incoming data paints an unclear picture for the momentum of disinflation. While Daly is not voting on policy this year, he is a regular participant in Federal Open Market Committee meetings and discussions.
The Fed has been tightening aggressively over the past 12 months, lifting its benchmark policy rate from near zero to a target range of 4.5% to 4.75%, although policymakers have recently slowed the pace of rate hikes. They downshifted to a quarter percentage point move on February 1 after hiking by half a point in December, which followed four consecutive 75-basis-point increases.
“These tightenings, while pronounced, remain appropriate given their magnitude and continued high inflation readings,” Daly said.
Daly has said in the past that interest rates must rise above 5% to meet demand and reduce inflation. He said last month that the FOMC’s December forecast – which showed the rate peaking at 5.1% this year, according to the median forecast – was still a good signal about the policy.
Inflation, which reached a 40-year high last year, fell in the last three months of 2022, but rose again in January. The month’s data also showed strong consumer demand and blockbuster hiring by companies.
Some of Daly’s colleagues have begun to say that interest rates may have to go further than they previously thought, and investors are now betting on a peak of around 5.45%. That level can be reached with an increase of 25 basis points in each of the three meetings. Daly did not specify in his speech Saturday how strict he thought was appropriate.
Policymakers will update their economic forecasts at their March 21-22 meeting.
Daly also talked about the uncertainty of what will lead to inflation in the future. Before the pandemic, Fed officials struggled for years to get prices up to the central bank’s 2% target as an aging workforce and sluggish productivity growth fueled inflation.
Currently, new factors including production reshoring, domestic labor shortages, the need to increase investment in technology and infrastructure amid the transition to greener energy sources, and potential changes to inflation expectations can all increase inflationary pressure. How those forces interact with disinflation in the past remains to be seen, Daly said.
“We don’t know what the trend will be,” Daly said. “But we know that, as we continue to spread the shock of persistent inflation, we must work to gather data and research that illuminates the path forward.”
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