Mary Daly, Interview: In Conversation with the European Economics & Financial Centre
11/10/22 – CPI Report
“So let’s talk about the numbers that came out today. It was indeed good news that inflation moderated its grip a bit. And the focus I’ll draw really is on core inflation, which, as you said, was 6.3% over the year coming down from its 6.6% … So it’s come down a little bit. Most of that drop was attributable to the declining core goods prices, which we’ve been expecting to ease a bit as people, two things happen, supply chains recovers, production change recover. And also, people rotate to services, back to services consumption and away from such a focus on goods consumption. That just helps bring demand and supply back in balance. That’s a welcome piece of news … But one month of data is not a victory make. And I think it’s really important to be thoughtful that this is just one piece of positive information.”
Fed Funds
“That (terminal) rate is very dependent on the evolution of the economy and all those pieces of information that I laid out. And I think the main thing that people need to know now from my vantage point is there’s a lot of uncertainty about what that rate will be. What will be the sufficiently restrictive rate is not known today … I support a more gradual approach of getting to it so we can be discovering the right rate as we go.
“But now, I think my own view is that we probably will have to tighten a little bit more than that to be sufficiently restrictive. I guess I can share little bit on the more higher terminal rate side than the SEP itself. I was one rate hike above the median (from September’s SEP, which was 4.6%) … I would rather move a little bit higher and have to come back than to move a little bit less high and have to then tell people we’re going to go higher because, at some point, it does seep into inflation expectations.
“But now if you take the SEP and you even say we move up to, say that the SEP goes up a little bit in December. Say that it goes up to an interest rate of 5% as the rate will hold at, that’s only 100 basis points higher than we have now. Right now, we’re 3.75% to 4.00%. So we have to 100 points to get to 5.00%. Well, that means we’re in a stone’s throw of that. And the pace of adjustments doesn’t need to be as rapid. And it gives you the opportunity to really pay attention to the critical aspects of the cumulative tightening of policy, including how tight our financial conditions relative to the Fed funds rate, that research we’ve talked about already, and also the lag and monetary policy, which, of course, they take time to work their way through.”