In order to avoid sending the economy into a recession, San Francisco Federal Reserve Bank President Mary Daly stated on Tuesday that the U.S. central bank is “resolute” about bringing down excessive inflation.
Daly stressed the need to “manage through this high inflation situation as carefully as we can, so that we do not leave longer-term damage to our labour market” during a seminar co-hosted with the Monetary Authority of Singapore.
Interest rates have been aggressively increased by the Fed in an effort to reduce inflation, which is currently over three times its 2% target. The central bank signalled it will likely boost the policy rate, which is currently in the range of 3%-3.25%, to 4.4% by year’s end and to 4.6% next year with the 75 basis point rate increase last week, its third consecutive increase of that size.
According to Fed Chair Jerome Powell, hiking rates at that rate will likely increase unemployment and be difficult for some families and companies, but in the long run, it will be more difficult to prevent inflation from becoming entrenched.
Daly stated on Tuesday that “price stability is vital.” The goal is that as the Fed rises rates to limit demand, the supply side will also heal, allowing the two to “meet in the middle.” According to her, the United States’ inflation is caused by excess demand about half of the time and constricted supply about half of the time.
She said that since labour supply has not yet recovered fully and supply chains are still twisted, the Fed may wind up having to do “a bit more” to boost demand in order to ensure that inflation does decline.