Fed’s Daly says the economy can handle rate hikes, but a mild recession is possible

Mary Daly, president of the Federal Reserve Bank of San Francisco, poses after giving a speech on the U.S. economic outlook in Idaho Falls, Idaho, on November 12, 2018.

Ann Saphir | Reuters

San Francisco Federal Reserve President Mary Daly acknowledged on Wednesday that an almost certain series of interest rate hikes over the coming months could tip the economy into a shallow recession, though she noted that is not her expectation.

In response to the worst inflation the US has seen in more than 40 years, the central bank official said she predicts a “rapid march” throughout the year against benchmark interest rates that will neither stimulate nor suppress growth – the “neutral” interest rate, in Fed language.

“In terms of the risk of being too fast or too slow, I see a quick march to neutral at the end of the year as a cautious path,” she said.

The measures, Daly said, would help curb an overheated economy, which now has 8.5% annual consumer price inflation.

She cited research by Princeton economist and former Fed Vice President Alan Blinder, who claimed that in 11 previous Fed hiking cycles, seven were “followed by a mild recession or none at all – basically a smooth landing,” she said in comments at the university. of Nevada Las Vegas. “Now that I’m in Las Vegas, I want to offer that I think those are pretty good odds.”

Asked later whether she considered a mild recession to match a soft landing or an acceptable result, Daly said her outlook is that the economy will slow to “something resembling growth during trend but not tipping into the negative” territory, but could potentially cross into negative territory. “

It would probably mean a shallow recession, unlike those associated with, for example, the financial crisis of 2008 or the stagflation days of the late 1970s and early 80s, when then-president Paul Volcker raised interest rates so much , that the economy fell in a double-dip recession.

Some Wall Street economists see the risk of recession rising. Deutsche Bank recently said it sees almost certainty of negative growth, while Goldman Sachs indicated around a 35% chance over the next two years.

“Recession is a word, but it describes a whole series of results,” Daly said in response to a CNBC question. “It could be a few blocks of a little bit below zero. It’s a very different beast than something like the financial crisis or the Volcker disinflation period.”

“It’s not something I anticipate or something I think will derail the long-term expansion,” she added.

Markets currently expect the Fed to adopt a series of aggressive rate hikes between now and the end of the year. Following an increase of 25 basis points or a quarter of a percentage point in March, the expectation is a series of movements of 50 basis points and then a slowdown that will bring the benchmark interest rate for bold funds to around 2.5% by the end of the year, according to CME Gruppedata.

Earlier in the day, Chicago Fed President Charles Evans said, “I’m open to making 50 basis point increases to front-load this bit.” St. Louis Fed President James Bullard said on Monday that he would like to move even faster and believes a move of 75 basis points next month would be appropriate, although traders have no chance of that happening.

For her part, Daly said she does not want the Fed to hit the brakes too quickly, as it could jeopardize the recovery of the pandemic, which has been strong outside the historic inflation pull.

“If we ease the brakes by methodically removing housing and regularly assessing how much more is needed, we have a good chance of adjusting smoothly and sliding the economy to its long-term sustainable path,” she said.

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