Two more rate hikes in the U.S. this year is a “very reasonable” forecast, said Mary Daley, president of the Federal Reserve Bank in San Francisco, but given how fast interest rates have already risen and how close they are likely to be, it’s better to proceed more slowly and carefully than before.
“In my opinion, it’s a sensible policy … to slow down policy as the target approaches,” Daley told Reuters in an interview late on Thursday.
Unlike last year, when the risk of inflation spiraling out of control outweighed the risk of slowing the economy, the risks of cutting interest rates and doing more are now “in balance,” he said.
“I want to make sure I balance those risks on both sides from being too little or too much,” Daly said. “Adding another six weeks to our decision point seems to me appropriate and prudent.”
Last week, central bank policymakers decided to keep policy rates steady in the current range of 5%-5.25%, ending a streak of 10 consecutive hikes designed to curb inflation. But with slow progress in easing price pressures, most central bank policymakers believe interest rates should reach 5.5%-5.75% by the end of the year.
For Dolly, the decision signaled a further slowdown in the pace at which the central bank has been raising rates since most of last year’s 75-basis-point increases, to a half-point hike in December and a quarter-point hike. year.
As for the next step in the future — the central bank meeting at the end of July — Daly remains in the dark. That depends on what she learns from social and business contacts and official economic data. “I want to keep the option because I think it’s sensible.”
Daly said his advisory group and other business contacts said inflation and persistent labor shortages were their biggest problems.
The personal consumer spending index, the central bank’s preferred measure, came in at 4.4%, down from last summer’s peak of 7%, but more than twice the central bank’s target of 2%. The unemployment rate rose to 3.7%, but is below the 4% Fed policymakers say is consistent with the U.S. workforce being fully employed on a steady basis.
“Right now we’re actually missing our price stability target, and that miss is not insignificant,” Daly said.
“What I want to do as we work resolutely to restore price stability — to give these people some peace of mind, life and livelihood back — is to make sure we do it as carefully as possible so that nothing happens by accident. , and our rush to do that today could send the economy into an unexpected error.”
People are worried that the housing market has bottomed out and that rents will start to rise again.
However, other data suggest that inflation is moving in the right direction, with a decline in both the frequency and magnitude of corporate price changes and a decline in near-term inflation expectations.
Banks, meanwhile, are “cautious” in lending and “cautious” in their balance sheets, he said. So far credit tightening has been in line with what he expected from a higher Fed policy rate, he said, adding that he was still aware that tightening could be exacerbated by the lagged effect of last spring’s banking turmoil.
This, he said, is another reason for rate hikes to slow down.
“Keeping a slow pace as we get closer to our goal … means we’ve stopped a lot of Americans in a much shorter period of time and wished we’d done more, or gone farther and wished we’d done less,” Daley said.
Compared to March projections, central bank policymakers see faster growth, a smaller rise in unemployment and a less significant drop in inflation.
“It wouldn’t be surprising if there were some more rate hikes coming,” Daley said. “More tightening may be needed to get the economy back to a stable equilibrium. But do I know that? No… we have to look at the data and figure out the final rate.”
Two more quarter-point rate hikes this year is “a very reasonable forecast at this point,” Daley said. “But no decision has been taken for me yet.
“If I knew we were going to have to raise and I was really confident about it, I certainly would have recommended something else, supported something else,” he added at the Fed’s June meeting. “But I was a big optimist and slowed down because as we get closer to the goal, we get less certainty without more data about what to do.”
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