May 20, 2024 - Economy

Exclusive: There's no "urgency" to adjust interest rates, Fed official says

Photo illustration of Mary Daly and the Federal Reserve Bank of San Francisco surrounded by abstract shapes.

Photo illustration: Lindsey Bailey/Axios. Photos: Bloomberg, Justin Sullivan via Getty Images.

San Francisco Fed president Mary Daly told Axios on Friday that it's not clear whether inflation is definitively receding and there is no "urgency" to adjust interest rates.

Why it matters: Inflation cooled for the first time in 2024 last month, relieving economists that progress might not have stalled out. But one month of data has not convinced Fed officials that price pressures are evaporating in a way that puts near-term interest rates back on the table.

What they're saying: "Fortunately, policy is in a very good place. We are in what I call the ready position," Daly told Axios at the University of San Francisco. "We can adjust policy as we need to."

  • Earlier this month, the Fed acknowledged signs that progress on inflation had stalled. That's raised questions about whether decades-high interest rates might need to be pushed up further to wrestle inflation down.
  • "I'm not confident inflation is yet coming down sustainably to 2%, but I don't see any evidence right now that we need to adjust upwards either," Daly said.

Daly spoke to Axios after giving a commencement speech for students in the university's school of management.

  • "From my conversations with these students and other students, they feel a lot of uncertainty," Daly said.
  • "I remind them that the economy they're going into is one with a very solid labor market and pockets of strength," Daly said. "We have an ongoing period of real wage growth, which, frankly, we didn't have for almost two years."

State of play: Last year, it looked like inflation was on a smooth, downward glide to the Fed's 2% target.

  • In 2024, the narrative changed: Now it looks like inflation could stick around for longer and the Fed might have to keep rates higher for longer to truly beat it — pushing off long-anticipated cuts.

The intrigue: The huge hurdle in bringing inflation down is housing. Rental prices continue to rise rapidly in government data.

  • Daly said that landlords — especially mom-and-pop owners — tend not to raise rents for existing tenants in step with national trends.
  • "That means they haven't really taken full advantage of that big surge in rents, and so then they're slower to give rent price declines," Daly said.
  • "I expect less improvement quickly in shelter inflation than you might traditionally see in a regular adjustment cycle," Daly said. "It doesn't mean it's not happening; it just means it isn't going to be rapid."

Daly says there is a "structural" supply and demand imbalance in the housing market, with not enough homes to meet the needs of would-be homeowners.

  • "When I go to localities across the district, the No. 1 thing they bring up to me is housing," Daly said. "And they're not asking me about just interest rates; they're asking me, 'Do you know how communities build housing that meets the needs of all?'"

The big picture: The Fed has raised rates at a historically rapid pace in recent years to arrest inflation, with relatively little economic pain. The oft-predicted recession has not yet materialized.

  • Daly said that companies and consumers accumulated a lot of cash during the pandemic that's helped keep the economy strong. But those reserves have since run down, San Francisco Fed data recently showed.
  • "We're certainly hearing from businesses that they don't have the cash reserves they had built up during the pandemic," Daly said, noting that this might make businesses more sensitive to higher interest rates.

The other side: Daly said that businesses see strong parallels to a flourishing labor market of pre-pandemic times.

  • At a recent roundtable with business leaders, Daly said this was a familiar sentiment: "Many agreed, but one person said it. They said: 'Boy, this economy feels exactly like 2019, except for inflation.'"

Lower-wage workers tend to mention egg prices, Daly said, as an example that prices are well above that of pre-pandemic times.

  • "The world just doesn't feel as balanced, and it doesn't seem like the opportunities to grow your income and your well-being are quite as good as they were yet in 2019," Daly said.
  • "What we also have is tight monetary policy and the expectation that the economy's going to slow further," Daly said. "We're trying to bring inflation down as gently as we can and working hard at it."
  • "I still think it's quite possible, but until it happens, people are going to feel uncertain about, really, if that can be accomplished," Daly added.

What to watch: Another uncertainty is how AI might affect job opportunities. On the one hand, the technology's emergence is helping revive the tech sector.

  • But there are questions about whether adoption means companies will need fewer workers.
  • Daly said that she was "no longer surprised" by how many companies are integrating generative AI into their firms — but firms are largely using it for back-office operations, not frontline work.
  • "A manufacturer that makes a part using generative AI runs the risk that part breaks or isn't doing its job," Daly said.
  • "But a manufacturer that uses generative AI to help with back-office operations makes the operations cleaner, nicer, and then takes the talent and puts it towards the manufacturing product."
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