Mary Daly, Interview: American Enterprise Institute

Fed Funds

“We’re going to go until the job is well and truly done which is 2% on average inflation. That means that I have a tighter path of policy, a higher terminal rate or a higher peak rate for the funds rate. I have it held longer than some of the bond investors would have predicted. But that’s what I think we are going to need to do at this point right now in order to bring price stability back.”

“We raise the rate in 2023 and then hold it throughout 2023. We hit that peak rate and hold it, there’s no rate cuts projected in that median forecast, and that would be a reasonable starting point … We can project, but then we have to watch and if the data come in stronger than we’ve penciled in we’ll have to respond more strongly. If inflation falls back much more quickly than we’ve anticipated, then we will respond.  That’s what nimble policy looks like. But right now I sit here and I think 11 months is a reasonable starting point. But I’m prepared to do more if more is required.”

Jobs

“We’re going to have to go into the mid-fours or even slightly higher on unemployment to get the sort of relief in the labor market we need to bring things back in balance. The final thing I’ll say about that is wage growth right now is four and a half to five depending on which series you’re looking at and what sector you’re looking at, and really we need it to be three and a half to four if we’re going to be in that sustainable place.”

GDP

“I expect a slowdown, the growth to be well below our trend rate. That’s going to feel like slow growth to people. We are going to feel like we’re in a sluggish economy, though I absolutely anticipate that.”

Inflation and the Phases of Tightening

“If you overreact to the high inflation and you do too much, you can throw the economy into a troubling and deep recession and then that’s hard to come back from. But the policy we’ve taken today in my judgment, what we’ve done so far is not achieving either one of those things. It’s not doing too much, it’s not doing too little. So far what we’ve done, and I would call this our first phase of tightening. We have simply taken the accommodation we had offered during the pandemic out of the economy and got rates into modestly restrictive territory. This next phase of tightening phase two is more challenging.  We have to then figure out, and we’ll do that meeting by meeting with data dependents and looking at the risks. What is the peak rate that would be sufficiently restrictive to bring price stability back? Then we’ll be in that third phase of tightening, which is how long should we hold it? All of those things together are how I think about doing monetary policy. It’s really a staged piece. We’ve finished phase one, we’re now in phase two, eventually we’ll get to phase three in 2023 and in all of those I’m weighing the cost of doing too little against the cost of doing too much.”