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, November 12 2018.
Ann Saphir | Reuters
San Francisco Federal Reserve President Mary Daly acknowledged Wednesday that a near-certain series of interest rate hikes over the coming months could tip the economy into a shallow recession, though she noted that isn’t her expectation.
Responding to the worst inflation the U.S. has seen in more than 40 years, the central bank official said she foresees “an expeditious march” through the year toward benchmark interest rates that would neither stimulate nor repress growth — the “neutral” rate, in Fed parlance.
“Accounting for the risks of being too fast or too slow, I see an expeditious march to neutral by the end of the year as a prudent path,” she said.
The moves, Daly said, would help slow down an overheated economy that now has consumer price inflation running at an 8.5% annual pace.
She cited research from Princeton economist and former Fed vice chair Alan Blinder, who asserted 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 remarks at the University of Nevada Las Vegas. “Now, since I’m in Las Vegas, I will offer that I think those are pretty good odds.”
Asked later whether she considered a mild recession to be the equivalent of a soft landing or acceptable outcome, Daly said her outlook is for the economy to slow to “something that looks like below-trend growth, but not tip into negative territory, but could potentially tick into negative territory.”
That likely would mean a shallow recession, unlike those associated with, for instance, the financial crisis of 2008 or the stagflation days of the late 1970s and early ’80s, when then-Chairman Paul Volcker jacked up rates so much that the economy fell into a double-dip recession.
Some Wall Street economists see recession risks rising. Deutsche Bank recently said it sees a near-certainty of negative growth, while Goldman Sachs indicated about a 35% chance over the next two years.
“Recession is one word, but it describes a whole range of outcomes,” Daly said in response to a CNBC question. “It can be a couple of quarters of a tiny bit below zero. That’s a very different beast than something like the financial crisis or the Volcker disinflation period.”
“That’s not something that I’m forecasting or something I think would derail the long-run expansion,” she added.
Markets currently expect the Fed to enact a series of aggressive interest rate hikes between now and the end of the year. Following a 25 basis point, or quarter percentage point, increase in March, the expectation is a series of 50 basis point moves then a slowdown that will take the benchmark fed funds rate to about 2.5% by the end of the year, according to CME Group data.
Earlier in the day, Chicago Fed President Charles Evans said “I’m open to doing 50 basis point increases in order to front-load this a little bit.” St. Louis Fed President James Bullard on Monday said he’d like to move even faster and thinks a 75 basis point move next month would be appropriate, though traders are pricing in no chance of that happening.
For her part, Daly said she doesn’t want the Fed to slam on the brakes too quickly as that could endanger the pandemic-era recovery, which has been strong outside of the historic inflation move.
“If we ease on the brakes by methodically removing accommodation and regularly assessing how much more is needed, we have a good chance of transitioning smoothly and gliding the economy to its long-run sustainable path,” she said.