Fed’s Daly: Must Be Mindful Of Not Loosening Policy Too Early Or Holding Too Long

Thank you, Alex for that kind introduction. And thank you to the Commonwealth Club World Affairs of California and the San Francisco Press Club for hosting this event. I’m really looking forward to a lively discussion. Now, the last time I was here, the world looked considerably different. It was November 2021, and we were still struggling to come out of the pandemic. Inflation was high, the labor market was rebounding, and the federal funds rate, the Federal Reserve’s primary interest rate tool, was near zero. Things have clearly changed. The federal funds rate is now above 5 percent, inflation has receded, although not completely, and the labor market has more than recovered and is now slowly moving towards a more sustainable level. That’s a lot of improvement and we should acknowledge it. But we are not there yet. So, we must continue the work of fully restoring price stability without a painful disruption to the economy. Today, I will review where we stand and discuss what it will take to finish the job. As always, the views I will express are my own and post: DALY: IF INFLATION FALLS MORE SLOWLY THAN EXPECTED, POLICY RATE MUST STAY HIGHER FOR LONGER DALY: IF INFLATION FALLS RAPIDLY OR LABOR MKT SOFTENS MORE THAN EXPECTED, LOWERING POLICY RATE WOULD BE NECESSARY post: DALY: BUMPINESS OF INFLATION DATA SO FAR THIS YEAR HAS NOT INSPIRED CONFIDENCE post: FED'S DALY: INFLATION IS NOT THE ONLY RISK. post: FED'S DALY: IF THERE ARE GRADUAL DECLINES IN INFLATION AND SLOW LABOR MARKET REBALANCING, THEN THE FED CAN NORMALIZE POLICY OVER TIME.

Good afternoon. It’s a pleasure to be here. Today is, of course, Saint-Jean-Baptiste Day, celebrated by many franco-Manitobans. Bonne Saint-Jean à toutes et à tous! When I started as governor on June 3, 2020, the economy was in crisis. It was early in the pandemic and Canada’s unemployment rate was 14%—the highest on record. Inflation was well below the 2% target—actually, it was slightly negative. The immediate priority was to avoid deflation and get the economy back on its feet. But since 2022, we’ve been fighting a new battle—high inflation. When the economy reopened, the combination of gummed up global supply chains, a strong surge in demand and Russia’s unprovoked invasion of Ukraine sent inflation sharply higher. It peaked at just over 8% in June 2022. For more than two years, our focus has been getting inflation back down. We’ve come a long way. Monetary policy has worked, and it is continuing to work. Since January, inflation has been below 3%, and our measures of underlying inflation have eased steadily. This has increased our confidence that inflation will continue to move closer to the 2% target this year. And earlier this month, we lowered our policy interest rate for the first time in four years. Low, stable and predictable inflation allows Canadians to spend and invest with confidence. It lowers uncertainty and encourages long-term investment. And it contributes to sustained job creation and greater productivity. This in turn leads to improvements in our standard of living. That’s why price stability is our number one priority. A key ingredient for price stability is a healthy labour market—one in which Canadians have the jobs they want, employers have the workers they need, and real wages grow in line with productivity. Economists call this maximum sustainable employment—the highest level of employment the economy can sustain without triggering inflationary pressures. The health of the Canadian labour market is what I’ll talk about today. In post: BOC’S MACKLEM: WE CONTINUE TO THINK WE DON’T NEED A LARGE RISE IN JOBLESS RATE TO GET INFLATION BACK TO TARGET BOC’S MACKLEM: SIGNS OF FINANCIAL STRESS ARE PARTICULARLY EVIDENT AMONG RENTERS, WHO ARE OFTEN YOUNGER WORKERS AND NEWCOMERS post: BOC'S GOV. MACKLEM: THE PATH TO A SOFT LANDING FOR THE ECONOMY HAS ALWAYS BEEN NARROW AND WE HAVE YET TO FULLY STICK THE LANDING.

post: BOC'S GOV. MACKLEM: IT'S REASONABLE TO EXPECT FURTHER CUTS.