The Federal Reserve’s upcoming rate hikes should be “gradual and not disruptive,” San Francisco Fed President Mary Daly said on Monday.
“We are not behind the curve. We’re not trying to combat some vicious wage-price spiral,” Daly said during a virtual conversation organized by Reuters.
Instead, the Fed is going to try to wean the economy off of “extraordinary support” put in place during the coronavirus pandemic to a self-sustaining path.
To achieve this goal, “you have to be data dependent but you also have to be gradual and not disruptive,” Daly said.
Daly agreed with other Fed officials including Fed Chairman Jerome Powell, that “liftoff,” or the first rate hike, would likely come in March.
“I do see rate increases in our future as early as March, if the data cooperate,” Daly said.
In December, none of the 18 senior Fed official penciled-in a path of rate hikes that would take the policy rate above “neutral,” which is estimated as a rate of 2.5%.
“You are supporting the economy, not pulling away the punchbowl completely and causing disruptions,” she said.
Over the weekend, Atlanta Fed President Raphael Bostic suggested in an interview with the Financial Times that the first rate hike in March might be 50 basis points instead of a quarter-point move generally expected, if the data showed inflation remained stubbornly high.
Asked if a half-point hike was possible, Daly, who is not a voting member of the Fed’s interest-rate committee this year, sounded skeptical.
“You don’t want, in my judgement, to overreact and ratchet up the rate so quickly that, as the rates percolate through the economy, it bridles it more than we think,” she said.
Daly underlined that the pace of rate hikes “is an ongoing discussion” and officials have not settled on a pre-set course.
“There is not something that we’ll just march through, no matter what the economy brings,” she added.
Later Monday, Kansas City Fed President Esther George called for a steep reduction in the Fed’s balance sheet.
Daly was more cautious, saying the central bank doesn’t have a lot of experience with how a reduction in the Fed’s portfolio impacts the economy. Daly said the central bank wants the runoff of the balance sheet to happen in the background.
The San Francisco Fed president said she doesn’t think that she doesn’t think that high inflation readings are now embedded in consumer psychology, which could spur inflation higher.
“I just don’t see evidence that that is occurring. It is a risk. It is one I’m focused on,” she said.