San Francisco Fed President Mary Daly said Friday that the Federal Reserve’s interest rate policy is bringing down inflation, but it might not happen as quickly as people would like.
An interview with Daly on CNBC showed that it was hard to find a place where monetary policy wasn’t at work.
“Inflation is going down, spending is going down, and growth is slowing down.” That’s how rules work. Even though it’s taking longer than we’d all like, she said, “that doesn’t mean it’s not working.”
People who don’t like the way the Fed runs things would quote Daly backwards. They believe that the fact that low inflation is taking longer to happen shows that the policy isn’t working.
They believe that rates of interest should either go up or not be talked about at all.
The Fed’s rate has stayed between 5.25% and 5.5% since July of last year.
The main question being discussed is whether or not these interest rates are “restrictive,” or enough to push down on demand.
At his June press conference, Fed Chairman Jerome Powell said, “The question of how restrictive is policy has become one that everyone is asking, and we’re asking too.”
“And you know that my answer has been that policy is strict,” he said.
The Fed thinks that an interest rate just below 3% would be “neutral.”
Some people, though, don’t think that Fed policy has much of an effect on the economy. They think the “neutral rate” is a lot higher because of things like the fact that the government has to borrow money every month from the financial markets. As proof of how loose policy is, these critics point to the rising stock market and other easy money situations.
Fed officials disagree, saying that even though stock prices are high, overall financial conditions are tight.
Fed officials are not all on the same page about this issue.
According to Austan Goolsbee, President of the Chicago Fed and a leading “dove” at the Fed, the economy is under a lot of downward pressure from the Fed. He said this earlier this week.
Early Friday morning, Richmond Fed President Tom Barkin said he’s not against the idea that the neutral rate is higher and policy is not as tight as people thought.
“We don’t know yet, but there is a way to find out.” “Move carefully and keep a close eye on the real economy,” Barkin said.
This seems to be a reason why the Fed shouldn’t lower interest rates in September.
Powell will be able to say more next Tuesday at an ECB conference in Sintra, Portugal.
