San Francisco Fed's Daly Favors Gradual Hikes in First Speech

(Bloomberg) -- In her first remarks as a monetary policy maker, Federal Reserve Bank of San Francisco President Mary Daly said that she favors continued gradual interest-rate increases as the labor market overshoots full employment and inflation comes in near-goal.

Daly said Tuesday the way she’s approaching policy is “very consistent with the way the FOMC has been approaching it” and favors “a gradual pace of normalization.” She will vote on interest rates at the Federal Open Market Committee’s Nov. 7-8 meeting.

Daly, who spoke at Wellesley College in Massachusetts, called the labor market “booming” and said that “happily,” the Fed is near its 2 percent inflation goal. In remarks that align her closely with the center of the FOMC, she explained that monetary policy makers don’t want to go too slowly on rates and risk getting behind and having to move rates up quickly.

“We have one instrument, two mandates, and no surgical precision,” Daly said.

The Fed has been gradually increasing borrowing costs since late-2015, lifting them three times this year with a fourth move expected in December. Most policy makers support that gradual path of increases, though how high rates will ultimately have to rise remains a topic of hot debate. Daly suggested that she’ll take a data-driven approach.

Dipping the Toe

“You put a toe in the water and see how much of a ripple it makes,” Daly said, noting that “the FOMC just raised rates in September, and we’re now in the watching phase -- what’s going on in the economy, how does it react.”

That wait-and-see prescription echoes what many members of the committee advocate, including Daly’s immediate predecessor, now-New York Fed President John Williams, and Fed Chairman Jerome Powell.

Daly suggested that she isn’t terribly concerned about a recent dip in U.S. equity markets.

“A correction in the stock market where it comes down a little bit is not necessarily a worrisome thing,” she said, explaining that many onlookers had thought that equity valuations had gotten high. While there are several reasons why stocks might have corrected now, “none of them seem out of sync with our economy getting to a more sustainable pace.”

Asked about Fed independence, following recent complaints about rate increases by President Donald Trump, she said that research shows an independent central bank is important to promoting a healthy economy, and that the way to deal with criticism is for the Fed to keep focusing on the task at hand.

“You just keep going back and doing your job,” Daly said.

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