Daly says Fed can hold rates steady if job market, inflation cool further

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.”

“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.”

Daly said she considers recent tightening in the bond market as equivalent to about one rate hike, and that it is a sign financial markets are trying to “find their footing.”

Daly suggested that if bond yields stay high, the Fed can hold its benchmark rate steady.

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.

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.”