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The Federal Reserve has made a “big change” and adopted a policy framework that means the current set of policymakers won’t exit its easy-policy stance as soon as might have happened in the past, said San Francisco Fed President Mary Daly on Wednesday.
In the past, Fed officials have often joked that their job in the economy was to take away the alcohol so that the party didn’t get out of hand. This is no longer the case, Daly said, during a webinar sponsored by Northeastern University.
“We won’t be preemptively taking the punchbowl away from the economy…in an effort not to let unemployment got too low,” Daly said.
“We want to discipline ourselves here and not get overly joyous that the unemployment rate is coming down, while so many other measures of labor-market activity remain well below pre-pandemic levels, still needing to recover,” Daly said.
“So what you’re going to see in our framework is a good, healthy, and I think appropriate, dose of patience,” she added.
That also means “don’t react to the fears of things occurring,” such has higher inflation, said the San Francisco Fed president, who is a voting member of the FOMC this year.
In a discussion with reporters after her webinar, Daly declined to disclose where her “dot” was on the latest Fed “dot plot” of the projected path of interest rates. Several of her colleagues have discussed their dots this week.
Read: Fed’s Kaplan says he sees first interest rate hike next year
Daly said she didn’t want to focus on any date on the calendar but rather on the economic conditions that needed to be in place before she would support a liftoff in interest rates.
Her conditions included: eliminating the shortfall in jobs caused by the pandemic, estimated at around 9 million; inflation rising to 2% “on a sustained basis;” and projections that inflation would rise above moderately above 2%.
Many economists are worried the Fed new policy framework may lead to persistently higher inflation and that the Fed will have to quickly reverse course and tighten policy to combat it.
Daly said economists worried about a return of high inflation — last seen in the late 1970s and early 1980s — “put far too little weight on the decades that followed the 1970s.”
The economic conditions in that decade “has not been our reality for a long time,” she added.
On the other hand, Daly said she didn’t see a broad sign of concern about asset bubbles. “I see pockets of concern — pockets of froth. It’s not a pervasive indicator that financial conditions are frothy overall, I just don’t see that.”
In its latest economic forecast released last week, the Fed projected that it will hold its interest rate near zero until at least the end of 2023. But many economists think the Fed could move by the end of 2022.
Stocks closed lower on Wednesday
DJIA,
COMP,
as investors worried about the potential of higher long-term Treasury yields.
