Fed's Daly: 'murky' outlook calls for policy patience, gradualism

Rather than forge ahead with the kind of aggressive policy that would be appropriate in the face of clear risks such as pandemic shutdowns or surging inflation, the Fed should now have "the boldness to wait," she said. The Fed raised short-term borrowing costs aggressively last year, and more slowly in the first half of this year.

San Francisco Federal Reserve President Mary Daly on Friday signaled she wants to adjust monetary policy only gradually, if at all, given the "murky" state of the economy and uncertainty over the outlook. "When uncertainty is high and the risk to our objectives more balanced, we need to practice gradualism ... and to adhere to the idea that patience, measured adjustments and continual reassessment make for better outcomes," Daly said in remarks prepared for delivery to the 33rd Frankfurt European Banking Congress.

"We are in a period where the risks seem high and the waters, murky," Daly said. Rather than forge ahead with the kind of aggressive policy that would be appropriate in the face of clear risks such as pandemic shutdowns or surging inflation, the Fed should now have "the boldness to wait," she said.

The Fed raised short-term borrowing costs aggressively last year, and more slowly in the first half of this year. In July it delivered what many analysts now believe was the final rate hike in its current battle with inflation. Fed policymakers have kept their benchmark short-term rate in the 5.25%-5.50% ever since, though Fed Chair Jerome Powell has kept the door open to a further rate hike.

As central banks globally wonder if they'll need to tighten policy further, Daly said, the debate is now centered on what constitutes a "sufficiently restrictive" policy rate, and how long to maintain that stance. Unlike many Fed policymaker speeches, including her own, Daly's talk in Frankfurt had few references to the economic data underpinning her views, and no signals at all about what specific economic developments would clear up the Fed's next move.

But many of Daly's colleagues have also noted the unusual mix of data that they too say calls for a wait-and-see approach. Inflation by the Fed's preferred measure has come down from last summer's 7.1% peak to 3.4% in September, an improvement but still far above the Fed's 2% goal. It's unclear if inflation is on track toward that goal, Daly said Friday.

At the same time, third-quarter U.S. GDP growth was nearly 5% annualized, far stronger than expected, and unemployment, at 3.9%, is only a few tenths above what it was when the Fed began raising rates in March 2022. It's uncertain whether today's economic dynamics are pandemic "remnants" or a new normal, Daly said.

And it's not clear if the effects of the Fed's rate hikes to date have had their full impact, she said. The Fed may get a bit more clarity on the state of the economy in coming weeks, with fresh data on inflation and the job market that economists broadly expect to show cooling but not collapse.

"The perils of deciding too quickly are real," Daly said. "Declaring certainty too early is not just a missed forecast. It's a policy mistake."