Daly Says Fed Should Hike Rates Expeditiously to Neutral by Year-End

(Bloomberg) -- U.S. central bankers should move “purposefully” and raise interest rates to neutral -- the level which neither speeds up nor slows down the economy -- by the end of the year, Federal Reserve Bank of San Francisco President Mary Daly said.

“I see an expeditious march to neutral by the end of the year as a prudent path,” Daly said Wednesday in a speech in Las Vegas, noting that most forecasters see that level lying around 2.5%. “Moving purposefully to a more neutral stance that does not stimulate the economy is the top priority.”

Fed officials raised their benchmark rate by a quarter-percentage point last month after keeping it pinned near zero for the previous two years to help the economy recover from Covid-19. They are also signaling a relatively rapid pace of rate increases over the rest of the year to get their benchmark rate to what they deem to be neutral, and keeping their options open to go higher if needed.

Daly, who has been one of the Fed’s more dovish officials, said she sees evidence the economy can absorb a 50 basis-point hike at next month’s meeting of the Federal Open Market Committee, echoing recent comments by other officials.

Half-Point Hike

“The case for a 50 basis-point adjustment is now complete,” Daly told reporters following the speech. “The economy is resilient; it can handle these adjustments.”

Removing accommodative policy should help curb the inflation rate, which is at the highest in four decades, while rebalancing supply-and-demand conditions throughout the economy, she said, adding:  “What I’m busy thinking about are three things: inflation, inflation, inflation.” 

The Fed’s actions and other forces may slow economic growth to below-trend levels later this year, Daly said, and may even cause a slight contraction for a few quarters, though that’s not her baseline forecast. 

Daly, who does not vote on FOMC decisions this year, voiced support for the Fed in May to announce a decision on when it will start reducing its bloated balance sheet, another measure that will remove policy support. 

She also said there’s evidence that the Fed’s policy actions and communications have already helped cool financial conditions, noting that 30-year mortgage rates have surged, topping 5% for the first time in more than a decade.

In her speech to an economic conference hosted by the University of Nevada, Daly said that the Fed should evaluate the effects of its policy tightening once it reaches neutral, citing ongoing uncertainty from the pandemic as well as Russia’s invasion of Ukraine as among risks to the economic outlook.

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