Deep recession unnecessary to bring down high inflation, Fed's Daly says

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While the U.S. central bank seeks to bring down stubbornly high inflation by tightening monetary policy and thus moderating demand, a deep recession isn't warranted to curb inflationary pressures, San Francisco Fed President Mary Daly said in a speech Thursday at Boise State University.

Still, Daly pointed out that a "downshift in economic activity" as well as rising unemployment will be needed to tame inflation in what the Federal Reserve hopes to be a soft landing. Jobless claims, though, are painting a different picture, as initial filings for unemployment claims fell to an eight-month low to 193K - not what the Fed wants to see given its efforts to slow the labor market.

Avoiding a harsh recession will "not be easy," she added, as a "myriad of risks" are narrowing the path for a smooth landing, including the lingering pandemic, Russia's invasion of Ukraine as well as a pending recession in Europe.

As the Fed has already lifted its benchmark lending rate 300 basis points since the start of its tightening cycle earlier in 2022 (with expectations for further rate increases), Daly noted the economy is seeing the "necessary" effects of higher interest rates in a move towards a sustainable path amid a slowdown in the housing market and softening projections for future growth.

"The full impact of [monetary] policies will unfold over time" as the data-dependent Fed expects the funds rate to top 4% this year compared with the current target range of 3.00%-3.25%, she said. Overall, "successful policy will require a vigorous analysis, extreme and regular data dependence and most of all a resolute commitment to delivering on" the Fed's dual mandate of stable prices and full employment.

Earlier, Cleveland Fed's Mester says U.S. recession won't stop central bank from raising rates.