(Bloomberg) -- Federal Reserve Bank of San Francisco President Mary Daly said U.S. policy makers ought to be gradually lifting interest rates to bring an economy that’s running above potential in for a soft landing.
“It wouldn’t be surprising to me that we would need to go up again in December and at least a couple of times next year,” Daly told Bloomberg News in her first interview on policy since she became head of the regional Fed branch on Oct. 1. “In my modal expectation, I think that’s what will be needed.”
She voted for the first time at the Fed’s policy meeting in November and will vote again at the Dec. 18-19 gathering, at which officials are expected to hike for the fourth time this year.
“We have an economy that is running above potential, a labor market that’s hot, robust,” and “normalizing policy in a way that creates a soft landing, I think, is a challenging issue,” she said. “It’s a process of iterative learning.” Daly served as San Francisco Fed research director when it was led by now-New York Fed President John Williams (NYSE:WMB).
The Fed is raising rates at a time when the economy is looking strong and wage pressures are creeping up. Unemployment has fallen to 3.7 percent, its lowest level since the 1960s, and inflation is near the Fed’s 2 percent goal.
“I don’t feel worried about inflation, I’m actually relieved that it’s come back to target, and I’m feeling optimistic that it will remain at target,” Daly said in the interview.
December Hike
The probability of a December rate increase is hovering around 75 percent, based on trading in federal funds futures, and most Fed officials have said they support further gradual rate increases. But 2019 could require policy makers to make tough calls: They expect to reach the level at which monetary policy turns from stimulative to restrictive -- so-called neutral -- at some point next year.
Some Fed officials say the central bank should survey the economic landscape when they reach that point, while others point to U.S.’s low unemployment rate and say rates may go higher to prevent the economy from running too hot. Policy makers’ economic projections show that the median official has penciled in a mild overshoot of neutral rate starting next year.
Daly said she’ll be watching how markets and the economy react to policy and keeping an eye out for shocks to the economy as she thinks about how policy makers should proceed once they hit the dividing line between easy and restrictive.
“Where to go after that remains uncertain,” Daly said, shortly before delivering a scheduled speech in Idaho Falls, Idaho.
Trade Uncertainty
She said she’s watching closely for any signs that uncertainty over trade policy is rattling businesses, and indicated she isn’t worried about recent stock market falls.
“There was a broad consensus across policy makers, but also market participants, that valuations were higher than could be supported,” she said. “So then a correction is something that I would view as a positive.”
She said from a policy maker’s perspective, it actually suggests that financial markets are "re-bridling themselves."
“When you see these other factors emerge, that financial markets are readjusting” and banks are getting themselves in order to sustain slower growth, then “that means that there are self-bridling mechanisms in the economy that are going to be augmenting the interest rates increases that we have taken.”
(Updates with more Daly quotes in fourth paragraph.)
