Mary Daly, President of the Federal Reserve Bank of San Francisco, poses after a speech on the U.S. economic outlook in Idaho Falls, Idaho November 12, 2018.
Anna Sapphire | Reuters
San Francisco Federal Reserve Chair Mary Daly conceded on Wednesday that a near-certain series of rate hikes in the coming months could push the economy into a shallow recession, although she noted that was not her expectation.
Responding to the worst inflation the US has seen in more than 40 years, the central bank official said they foresee “a brisk march” through the year towards benchmark interest rates that would neither stimulate nor stifle growth – the ” “neutral” interest rate in Fed parlance.
“Considering the risks of going too fast or too slow, I see a brisk march to neutrality by the end of the year as a sensible path,” she said.
The moves, Daly said, would help slow an overheated economy that now has annual consumer price inflation at 8.5%.
She cited research by Princeton economist and former Fed Vice Chairman Alan Blinder, who claimed that in 11 previous Fed walking cycles, seven have been “followed by a mild recession or no recession — basically a soft landing,” she said in a note from the University of Nevada-Las Vegas. “Now that I’m in Las Vegas, I’m going to offer I think those are pretty good odds.”
Asked later if she viewed a mild recession as the equivalent of a soft landing or an acceptable outcome, Daly said her prospects are that the economy will slow to what “looks like below-trend growth, but not in the tipping negative but could potentially cross into negative territory.”
That would likely mean a shallow recession, unlike those associated with, say, the 2008 financial crisis or the stagflation days of the late 1970s and early 1980s, when then-Chairman Paul Volcker hiked rates so much that the Economy crashed into a double-dip recession.
Some Wall Street economists see recession risks rising. Deutsche Bank recently said it almost certainly sees negative growth, while Goldman Sachs said it has a roughly 35% chance over the next two years.
“Recession is one word, but it describes a whole set of outcomes,” Daly said in response to a CNBC question. “It can be a few quarters a bit below zero. This is a very different beast than something like the financial crisis or Volcker’s disinflationary period.”
“It’s not something I’m predicting or something I think would derail long-term expansion,” she added.
Markets are currently expecting the Fed to make a series of aggressive rate hikes through the end of the year. After rising 25 basis points, or quarter-points, in March, a series of 50-basis-point moves and then a slowdown can be expected, according to the CME, which will bring the benchmark fed fund rate to around 2.5% by the end of the year, according to group data.
Earlier in the day, Chicago Fed President Charles Evans said, “I’m open to a 50 basis point hike to bring that forward a bit.” St. Louis Fed President James Bullard said Monday he would like to moving faster and sees a 75 basis point move over the next month as reasonable, although traders are pricing in no chance for that.
For her part, Daly said she doesn’t want the Fed to slam on the brakes too quickly as it could jeopardize the pandemic-era recovery, which has been strong outside of historical inflationary action.
“If we ease the brakes by systematically removing shelter and regularly assessing how much more is needed, we have a good chance of achieving a smooth transition and putting the economy on its long-term sustainable path,” she said.