Fed's Daly Calls Cooling Demand Without Causing Recession a 'Struggle'




  • In Business
  • 2022-09-28 02:42:24Z
  • By Bloomberg
 

(Bloomberg) -- The Federal Reserve's delicate balance between curbing demand enough to slow inflation without causing a recession is a "struggle," said San Francisco Fed President Mary Daly.

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To keep inflation low and stable, "we have to balance that off with our dual mandate with full employment," Daly said at the Symposium on Asian Banking and Finance. "Trying to navigate that to bring inflation down while we do so as gently as possible, not to tip unnecessarily the economy into a downturn that actually influences the full employment part of our mandate, is a struggle."

Daly, speaking Tuesday evening San Francisco time at the virtual conference that was co-sponsored by the San Francisco Fed and the Monetary Authority of Singapore, said that she hopes the Fed's actions to bridle demand will meet the supply chain's recovery "in the middle," but that that may not be possible.

"While there's hopeful signs, I'm always mindful that we might have to do a little more on demand because supply chains are just sluggish, or supply is sluggish to recover," Daly said.

Daly's comments about the Fed's commitment to bringing down inflation echoed those of some of her colleagues, who spoke earlier Tuesday elsewhere. St. Louis Fed chief James Bullard warned that inflation is a "serious problem" and that the central bank's credibility was on the line.

Fed Chair Jerome Powell, speaking after the central bank's September meeting last week, said policy makers will not flinch from confronting inflation, despite the pain it may cause the US economy. The hawkish message has since roiled financial markets and contributed to a steep rise in bond yields.

Fed officials raised interest rates by 75 basis points on Sept. 21 for the third straight meeting, bringing the target for the benchmark federal funds rate to a range of 3% to 3.25%. Median projections show officials forecast that rates would reach 4.4% by the end of this year and 4.6% in 2023, a more hawkish shift in their so-called dot plot than anticipated.

Daly said many aspects of the economy will likely look different post-pandemic than they did before, though exactly how remains uncertain.

"Some of the factors that were pushing inflation down and even keeping the neutral rate of interest so low may be changing," Daly said. "We might very well come out of this episode with higher inflation and be in a world where we're trying to balance inflation to the target."

Ravi Menon, managing director of Singapore's central bank, also spoke at the event with Daly from the city-state.

  • "Monetary policy can't do much about labor supply," Menon said

  • He added that contact-intensive sectors are still seeing labor shortages, and it's not clear how long that might be extended

    • The labor-force participation at retirement age seems more structural in nature, Menon said

  • Economic slowdown is needed to relieve demand pressure, Menon said

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