Fed Chair Mary Daly: Inflation is not the only risk, policy must tread carefully

Fed Chair Mary Daly: Inflation is not the only risk, policy must tread carefully
Fed Chair Mary Daly: Inflation is not the only risk, policy must tread carefully

The Federal Reserve must “exercise caution” as it works to bring inflation under control, San Francisco Fed President Mary Daly said Monday, noting that rising unemployment is a growing risk important.

“We must continue our efforts to fully restore price stability without painfully disrupting the economy,” Ms. Daly said in a speech prepared for the Commonwealth Club of San Francisco. And while there is still “work to do” to reduce inflation, she added, “inflation is not the only risk we face.”

Further reducing inflation will likely require restraining demand, she added, and although the unemployment rate – currently at 4% – remains below long-term sustainable levels, “a future slowdown in the labor market work could result in an increase in unemployment. To avoid this, the Fed must be both “vigilant and open.”

Earlier this month, the Fed left interest rates in the 5.25% to 5.5% range, where they have been since last July, and policymakers indicated they would not cut interest rates. interest only once this year, instead of the three rate reductions planned in March.

Ms. Daly did not say how many rate cuts, if any, she thinks the Fed will need to make to navigate the twin risks of still too high inflation and the risk of potentially rising unemployment.

At this point, she said, policy must be “conditional” and willing to take either path, including keeping rates at their current level for longer if inflation is disappointing, or cutting rates if the job market weakens more than expected.

And, she added, “if we continue to see gradual declines in inflation and a slow rebalancing of the labor market, then we can normalize our policy over time, as many expect.”

Inflation by the Fed’s targeted measure, the year-over-year change in the personal consumption expenditures price index, was 2.7% in April and March, compared with 2.5% in February and January. .

More recent data suggests the index may not have increased at all from April to May, according to economists’ forecasts.

“The volatility in inflation data since the start of the year has not inspired confidence,” Mr Daly said. “Recent figures are more encouraging, but it is unclear whether we are truly on the path to lasting price stability. (Reporting by Ann Saphir; editing by Andrea Ricci)

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