Federal Reserve Bank of San Francisco President Mary Daly said policymakers can hold interest rates steady if the labor market and inflation continue to cool or financial conditions remain tight.
“If we continue to see a cooling labor market and inflation heading back to our target, we can hold interest rates steady and let the effects of policy continue to work,” Daly said Thursday in remarks prepared for an event hosted by The Economic Club of New York.
“Importantly, even if we hold rates where they are today, policy will grow increasingly restrictive as inflation and inflation expectations fall,” Daly said. “So, holding rates steady is an active policy action.”
Fed officials are trying to decide whether they need to hike their benchmark lending rate again after raising it by more than five percentage points over the last 19 months. They left the rate unchanged at their last policy meeting in September, though 12 out of 19 officials signaled they would support another rate increase this year, according to projections released at the meeting.
“Likewise, if financial conditions, which have tightened considerably in the past 90 days, remain tight, the need for us to take further action is diminished,” she added.
However, Daly said if improvement trends stall “we can react to those data and raise rates further until we are confident that monetary policy is sufficiently restrictive to complete the job.”
Bonds Tightening
Daly suggested that the recent jump in bond yields offers another reason for the Fed to hold its benchmark rate steady.
Longer-term interest rates have been on the rise since the September meeting as markets adjust to the Fed’s message that the benchmark is likely to remain high for longer than previously thought. The yield on 30-year Treasury securities rose above 4.85% this week, reaching the highest levels since 2007.
Daly said she considers recent tightening in the bond market as equivalent to about one rate hike, “so the need to tighten additionally is not there.”
The San Francisco Fed chief said in her view the bond market tightening has not been disorderly, rather “what is happening is financial markets are actually trying to find their footing and the right price for things.”
Investors seem to be absorbing the uncertainty in the data in line with policymakers, Daly said.
“When bond yields rose, we saw the probability on the November meeting go down. To me, that says the markets are understanding how we think about things and they do have the reaction function in mind,” she said.
Daly, who doesn’t vote on policy this year, said Sept. 22 that policymakers are committed to reaching their 2% inflation target and will do so “as gently as possible.”
Speaking separately on Thursday, Richmond Fed President Thomas Barkin said surging Treasury yields reflect strong economic data as well as heavy supply, adding that it’s a return to a more normal rate seen in prior years.
“There’s a lot of fiscal issuance out there,” Barkin said at an event hosted by the University of North Carolina Wilmington. “That’s creating a lot of supply. And the data have come in a lot stronger lately.”
Read More: Fed’s Barkin Says Yield Jump Reflects Strong Data, Fiscal Supply
(Updates with Barkin comments in 14th paragraph.)
