The Federal Reserve should not be quick to raise short-term interest rates to cool inflation because there are costs to workers and the economy, said San Francisco Fed President Mary Daly on Tuesday.
“Pre-emptive action isn’t free. Like all insurance there are costs,” Daly said during a speech at the Commonwealth Club in San Francisco.
Interest-rate hikes now would not ease supply-chain issues but would curb demand 12 to 18 months from now, slowing down the economy when millions of sidelined workers are ready and able to come back to work, she said.
Daly said she thinks there are reasons to expect that high inflation won’t last, even though the sharp rises have been a surprise. Consumers will shift spending away from goods once the economy reopens, she said.
“I expect inflation to moderate as the pandemic recedes,” Daly said.
Fed officials are divided over how to react to inflation, which has risen to the highest level in 30 years.
Earlier Tuesday, St. Louis Fed President James Bullard urged his colleagues to “tack in a more hawkish direction.” He said early action now would preclude the need to push short-term rates up sharply down the road.
Another reason to be patient, Daly said, was the outlook over the next nine months was just too uncertain for the Fed to move.
“While it is easy to mistake motion for competence or action for attention, running headlong into a fog can be costly,” she said.
Daly has been a voting member of the Fed’s interest-rate committee this year. She said there was no question the central bank had the tools to bring down high inflation if necessary.
The Fed is now buying Treasurys and mortgage-backed securities but has started to slow down the pace of the purchases. Under the plan announced earlier this month, the purchases will end next June. Daly said the Fed can watch the economy carefully while the tapering is underway.
“Over the next several quarters, as tapering occurs, we will watch how the economy does and see whether inflation eases and workers come back. As we get a clearer signal, we will be ready to act accordingly, continuing to provide or remove support as needed to ensure the economy settles at a sustainable place,” she said.
The yield on the 10-year Treasury note
has been moving higher in recent days, but remains below the high for the year of 1.75% seen in early April.