Fed’s Daly Says Inflation Pressures Likely to Ease in 2022

Mary Daly speaks during a Bloomberg Television interview in San Francisco, on Nov. 13, 2019. (Photographer: David Paul Morris/Bloomberg)

Fed’s Daly Says Inflation Pressures Likely to Ease in 2022

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Factors pushing U.S. inflation higher are likely to ebb at the start of 2022, said Federal Reserve Bank of San Francisco President Mary Daly.

“There’s just going to be a sequence of these temporary factors that are going to persist probably through the end of the year,” Daly said Friday in an interview with Bloomberg News. “They will start to roll off at the beginning of next year. How many of them will roll off or whether other bottlenecks will emerge as we start to get the economy back into shape and get back into recovery is hard to say.”

Fed’s Daly Says Inflation Pressures Likely to Ease in 2022

Daly, a voter this year on monetary policy, said she expects inflation to remain elevated through the end of 2021 and that a variety of pressures are adding to price increases right now, including supply-chain constraints in shipping and semiconductor manufacturing and the so-called base effect of comparing this year’s prices to last year’s pandemic-induced declines.

Fed officials last month held interest rates near zero and vowed to maintain their massive monthly asset purchases until achieving “substantial further progress” on employment and inflation. There’s a range of views among officials about when that test will be met.

Details of their April 27-28 meeting showed that a number of officials were open to discussing scaling back bond buying at upcoming meetings if the economy continued to make rapid progress.

Daly said monetary policy is in a good place right now and that policy makers need to be patient in light of the more than 8 million people who are still unemployed compared with pre-pandemic levels. Despite some “frothy” spots in financial markets, overall they’re also in a good place, she said.

Some of Daly’s colleagues on the Federal Open Market Committee, including Dallas Fed President Robert Kaplan and Philadelphia Fed President Patrick Harker, have said they think the Fed should start talking about tapering its bond purchases sooner rather than later. But Chair Jerome Powell has said it’s too early to think about removing some of the central bank’s accommodative policy.

”I don’t want to front run the committee discussions by coming down on any particular thing because we’re not in a place where that’s been decided,” Daly said. “You would hear that first from the chair and he has signaled that we’re not ready to start talking about talking about these types of things.”

The Fed is buying $80 billion of Treasuries and $40 billion of mortgage backed securities every month. Some policy makers have said that when the central bank does start scaling back purchases, it should start with MBS, arguing that record-high housing prices are a sign that market no longer needs the Fed’s support.

Daly said that some of the increases in housing prices are due to structural changes in where people want to live. Many people left smaller city apartments for houses in the suburbs in the midst of the pandemic. Many of the home purchases are still for primary residences and not the secondary or even tertiary home buying that helped fuel the 2008-2009 financial crisis, Daly said.

“Home buyers and households in general are incredibly well positioned,” Daly said. “Their leverage is low, their savings is high, they’ve done well after the financial crisis to get their balance sheets in order. They’re also having this happen while the economy is starting to grow faster so that would support these dynamics which would support these valuations.”

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