Fed’s Daly: Lowering inflation is ‘number one priority’

People shop at a supermarket as inflation has hit consumer prices in Manhattan, New York, U.S., June 10, 2022. REUTERS/Andrew Kelly

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June 24 (Reuters) – Bringing down inflation is the U.S. central bank’s “number one priority right now”, but raising interest rates is unlikely to trigger a recession, said Mary Daly, President of the Federal Reserve Bank of San Francisco.

The central bank’s 75 basis point interest rate hike last week to a range of 1.5% to 1.75% “puts policy on a fast track to neutrality by the end of the month.” ‘year,” Daly said in remarks prepared for delivery to Chapman University.

“After that, I see further tightening beyond neutral as the likely next step,” she said.

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The exact level of high rates will largely depend on factors beyond the Fed’s control, she said.

This is a point that Fed Chairman Jerome Powell has also made, as much of current inflation stems from rising energy and food costs linked to Russia’s war in Ukraine, as well as continued supply chain and labor supply constraints.

“If supply continues to fall and inflation stays high, we will have to do more,” Daly said. “If conditions improve and supply rebounds, we can do less.”

Either way, she said, the economy will likely slow and the unemployment rate will likely rise from the current level of 3.6%.

But that’s unlikely to lead to the kind of painful recession that followed in the 1980s, the last time the Fed raised rates sharply to fight high inflation, she said.

The costs of adjusting to higher interest rates and slower growth will be smoother this time around, she said, in part because inflation expectations are much better anchored, and in part. partly because higher rates should cool inflation by reducing excess demand for goods and labor, well before they start to reduce real output and employment.

“I expect the adjustment costs to be moderate, with some slowing in GDP growth below its long-term trend and an increase in the unemployment rate from the very low levels we are experiencing today. today,” she said.

“This would, in my view, be a relatively smooth transition from a pandemic-ravaged and very accommodative economy to one in which tighter policy supports both full employment and price stability.”

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Reporting by Ann Saphir, editing by Deepa Babington

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