Federal Reserve still has "long way to go' to get inflation down to goal, SF Fed head says
The economy has "good momentum" and it's starting to feel the effect of tighter monetary policy but inflation is still too high, San Francisco Fed President Mary C. Daly said Friday during an online event sponsored by the American Enterprise Institute. "We are far away from our price stability goal" of 2%.
"We're finally getting the healing of supply chains" and core inflation is starting to come down, she noted. Housing costs in rental prices will take about a year for that to filter through
Non-housing core services inflation is still elevated, and that will take longer to moderate, she added.
12:51 PM ET: Event ends.
12:50 PM ET: Deciding on the long-run neutral rate, the level at which the policy rate neither fuels nor hinders the economy, is a major consideration for the Fed in the coming year, Daly said. "I'm going to remain open-minded" as it of it needs to go up or down, she said.
12:43 PM ET: Daly expects that keeping the policy rate at the peak for 11 months "is a reasonable starting point," but that could change depending on incoming data.
12:38 PM ET: She's expecting a slowdown in consumer spending in 2023 as labor supply/demand come more into balance.
12:36 PM ET: "The resiliency of the American consumer has been surprising to me." Consumer sentiment had been down, but "you're not seeing it" in consumer behavior. People above the median income level still have excess savings, she said.
12:23 PM ET: "I'm not sure why markets are so optimistic about inflation," Daly said. Still, inflation risk remains to the upside. "If data comes out better, of course we'll adjust."
12:21 PM ET: Child care access is lower than it was before the pandemic and is "much more costly." That's hurt the ability of some people to return to the workforce, she said.
12:14 PM ET: Daley said that her inflation projection has increased since the Fed's September Summary of Economic Projections.
"Why is core services rising?" The labor market is out of balance and "that's causing employers to bid up wages." Wage growth itself is not the problem, the problem is the labor market imbalance, she said. The economy may need mid-4% or more unemployment rate to achieve labor market balance, she said. (Note that the November unemployment rate was 3.7% near a 50-year low.)
The speech is the first by a Federal Reserve official since the central bank raised its key rate by 50 basis points on Wednesday, smaller hike than the 75-bp increases at each of the past four meetings.
During the latest Fed meeting, the median projection for the key rate rose to over 5% by Federal Open Market Committee members by the end of 2023.