Fed's interest-rate policy is working, just taking longer than everyone would want, Daly says

By Greg Robb

Critics say the opposite: the longer policy takes, the more it looks like it isn't working

Federal Reserve interest-rate policy is working to lower inflation but maybe not as quickly as consumers would hope for, San Francisco Fed President Mary Daly said Friday.

"It is really challenging to look anywhere and not see monetary policy working," Daly said, in an interview on CNBC.

"We have growth slowing, spending slowing, the labor market slowing, inflation coming down. That's how policy works. Now it's taking longer than we'd all like, of course, that that doesn't mean it's not working," she added.

Critics of Fed policy would turn Daly's quote on its head. They think the fact that it is taking longer for policy to bring inflation down is a sign that it isn't working.

They think interest rates might have to move higher or at least talk of rate cuts should be off the table.

The Fed has kept its policy rate at 5.25%-5.5% since last July.

The key debate is whether this level of rates is "restrictive," or putting enough downward pressure, on demand.

"The question of how restrictive is policy has become one that everyone's asking, and we're asking too," said Fed Chairman Jerome Powell at his press conference earlier in June.

"And you know my answer has been that policy is restrictive," he added.

Fed officials believe a "neutral" interest rate would be just under 3%.

But critics think Fed policy is not really impacting the economy much at all. They think the "neutral rate" is much higher due to special factors including how much the government has to borrow in financial markets every month. These critics point to the soaring stock market and other easy financial conditions, as a sign of how loose policy is.

Fed officials push back, saying overall financial conditions are restrictive despite high equity prices.

Fed officials are not marching in lockstep on this question.

Chicago Fed President Austan Goolsbee, a leading dove at the Fed, said earlier this week he thinks that the Fed is putting an historic amount of downward pressure on the economy.

Richmond Fed President Tom Barkin earlier Friday that he's open to the idea that the neutral rate is higher and policy is not as restrictive as thought.

"It is too soon to tell, but there's one way to find out. Proceed deliberately while keeping a close eye on the real economy," Barkin said.

This seems to argue against a Fed interest rate cut in September.

Powell will have a chance to weigh in again next Tuesday when he speaks at an ECB conference in Sintra, Portugal.

-Greg Robb

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06-28-24 1232ET

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