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- San Francisco Federal Reserve Bank President Mary Daly raises concerns about raising interest rates too quickly too soon despite soaring inflation
- Ms Daly says history shows being too abrupt and aggressive when hiking rates can have a destabilising effect on economic growth and consumer prices
- As such, while it seems a March rates hike is still imminent, Ms Daly says she is not prepared to lift interest rates by the predicted half a percentage point so soon
- According to CME Group’s FedWatch tool, interest rate futures are priced for a 50-basis-point rise in March and expected to tighten by up to 1.75 percentage points before the end of 2022
- Ms Daly says fears around a potential Russian invasion of Ukraine are beginning to impact more than just oil prices as the world watches the Eastern European standoff
Despite US inflation soaring 7.5 per cent year-on-year in January, San Francisco Federal Reserve Bank President Mary Daly said raising interest rates too aggressively could be counter-productive to the central bank’s goals.
Ms Daly told CBS’ ‘Face The Nation’ that while it was “obvious” the Fed needed to pull some of the accommodation out of the economy, history showed that raising rates too much, too quickly, could have a “destabilising effect on the very growth and price stability that we’re trying to achieve”.
“So, what I would favour is moving in March and then watching, measuring, being very careful about what we see ahead of us, and then taking the next interest rate increase when it seems the best place to do that,” Ms Daly said.
It seems that while the Fed is still set to hike rates for the first time since the start of the pandemic in March, Ms Daly is not prepared to come out of the gate with a half-percentage-point increase so soon.
The comments are in stark contrast to what St Louis Fed President James Bullard said last Thursday when he signalled the need to lift interest rates by a full percentage point before the end of June.
“I’d like to see 100 basis points in the bag by July 1,” Mr Bullard told Bloomberg after the startling inflation data was announced.
It seems markets are pricing in a rates hike in between the two viewpoints expressed by Ms Daly and Mr Bullard: according to CME Group’s FedWatch tool, interest rate futures are now fully priced for a 50-basis-point rise in March, with rates expected to tighten by up to 1.75 percentage points before the end of 2022.
While supply chain disruptions and the spread of Omicron have been major drivers of the inflation surge in the States, fears around a potential Russian invasion of Ukraine are beginning to impact more than just oil prices as the world watches the Eastern European standoff.
When adding these geopolitical tensions to the mix, Ms Daly said it was too early to call if the Fed would commit to several rates hikes this year.
She said the primary economic effect of geopolitical tensions like what’s being seen between Russia and the West over Ukraine was consumer uncertainty.
“Americans are already facing quite a bit of uncertainty: uncertainty about when COVID is ever going to leave our shores; uncertainty about how the economy is going. So, this is just another factor, and uncertainty, we know, affects consumer sentiment and ultimately affects consumer demand.”
She added that despite the economic challenges faced by the US and many places around the world, American businesses were still typically bullish on the US economy.
“They’re bullish on coming out of the pandemic strong, but they’re also very aware that we’re not out of concerns yet, and we have many things in our future that we have to balance.”
