‘Eye-Popping’ Inflation Should Subside in 2022, Fed’s Daly Says

(Bloomberg) -- San Francisco Federal Reserve President Mary Daly expects supply-chain constraints to persist into next summer, but price pressures should abate after pandemic effects wane.

“As we get through the pandemic, we’ll see prices moderate and we’ll be back to that situation in which we had for more than a decade of forces pushing inflation down, not pushing inflation up,” Daly told a virtual discussion hosted by the National Association for Business Economics on Tuesday. 

Daly is a voter this year on the policy-setting Federal Open Market Committee. She has been one of the more dovish members of the FOMC, but her remarks were slightly more hawkish than previous comments. 

In September she said the Fed likely wouldn’t raise rates next year. Daly did not offer an explicit outlook for rates on Tuesday, but acknowledged price pressures were striking, calling inflation data “eye-popping.”

“If things persist for long enough do they get into mindset? I don’t see that yet -- I haven’t seen it drift into longer-run inflation expectations -- but I’m watching that carefully,” Daly said. She also said the economy faced higher-than-usual uncertainty, and it would not be until next summer that the post-pandemic picture was clear.

That would take policy makers to around the middle of 2022, which coincides with when investors expect the Fed to start raising interest rates, according to bets in financial futures markets. Fed officials last week left rates near zero and said they would begin scaling back their massive bond buying program later this month, on a schedule that would wrap up the process by mid-2022. 

Fed officials say the taper decision doesn’t imply a direct signal on interest-rate policy, but some officials have argued for flexibility to raise rates as soon as the taper ends. 

On Monday, St. Louis Fed President James Bullard said that “if we had to, we could end the taper somewhat sooner.” In remarks on Tuesday he returned to that theme, repeating that he has penciled in two rate hikes for 2022 and noting that firms enjoy strong pricing power that means they can pass along higher prices to consumers.

“This sounds like an inflationary process that has gotten started in the last six to eight months,” Bullard told a conference hosted by UBS. “That development is concerning.”

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