Fed’s Daly Says ‘Patience’ Still Appropriate as Trade Risks Rise

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The Federal Reserve has reason to be “patient’’ on monetary policy given the uncertainties around possible new U.S. tariffs on Mexican goods, said San Francisco Fed President Mary Daly.

The U.S. economy is still in a “really good place,” with strong labor-market fundamentals, inflation moving toward the Fed’s 2% target, and interest rates appropriately priced, Daly told reporters in Singapore on the sidelines of the Symposium on Asian Banking and Finance, jointly hosted by the Monetary Authority of Singapore and the San Francisco Fed.

Fed’s Daly Says ‘Patience’ Still Appropriate as Trade Risks Rise

President Donald Trump’s tariff threat against Mexico hasn’t yet been accompanied by enough detail for the Fed to model its impact on economic growth, said Daly. Recent U.S. tariff measures have triggered “small upward pressure” on inflation, with businesses largely withholding from passing on costs to consumers, she said.

Daly said she frequently speaks with businesses that are looking more cautiously at risky investments amid heightened global trade risk. If the situation worsens and growth slows sharply, or inflation appears to be failing to pick up in a sustainable manner, then policy makers would have to consider interest-rate cuts, she said.

As for the multiple inversions of the U.S. yield curve -- the gap between short- and long-end rates -- Daly said the curve hasn’t “had a sustained and deep inversion,” which would typically be the signal for a recession. Slower economic growth probably will push down the long end of the curve, in addition to global investors’ “flights to safety” in the U.S.

Policy Tools

Daly’s comments came as JPMorgan Chase & Co. slashed its projections for U.S. Treasury yields, anticipating that the pressures of the trade war will hobble American economic growth and force the Fed to cut interest rates.

The San Francisco Fed president, who isn’t a voter on the policy-setting Federal Open Market Committee this year, said central bankers globally have to consider a range of tools for the next downturn. While the Fed has made it clear that interest rates are its primary policy tool, it’s also seeking input from researchers, businesses, and market participants on how to adjust its policy framework.

Speaking earlier Monday to bankers in Singapore, Daly said in response to a question on Modern Monetary Theory that households and countries both need to keep “balance sheets in alignment,” in order to avoid passing on debt obligations to the next generation. That’s a principle to which MMT doesn’t hold up. However, she said she was open to debating other components of MMT and wasn’t dismissing it wholesale.

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