Mary Daly, San Francisco Fed President
"Quantitative tightening should be pursued rapidly after 1-2 rate hikes"
[Asia Economy New York=Correspondent Baek Jong-min] Mary Daly, President of the San Francisco Federal Reserve and a leading dove within the U.S. Federal Reserve (Fed), expressed the opinion that quantitative tightening should follow one or two interest rate hikes. This means that interest rate increases should be implemented gradually, while quantitative tightening should be executed early and swiftly.
According to Bloomberg News, President Daly stated at the American Economic Association (AEA) annual meeting panel discussion on the 7th (local time), "I can imagine balance sheet adjustments after one or two interest rate hikes."
She said, "I prefer to adjust the policy rate gradually and begin reducing the Fed's balance sheet earlier than during the previous tightening period." She was negative about starting interest rate hikes and quantitative tightening simultaneously.
President Daly also mentioned that she wants interest rates to rise moderately.
Her remarks that day clarified her stance on the timing of quantitative tightening. The day before, Daly had said, "At this point, tightening asset purchases is very appropriate."
This can be seen as a signal that the Fed may prefer quantitative tightening of its $8.8 trillion in assets over more than three interest rate hikes.
The market is already expecting four interest rate hikes this year. The Chicago Mercantile Exchange FedWatch tool predicts three rate hikes in March, June, and September. The possibility of a rate hike in December is also as high as 48.8%.
Daly’s dovish stance can be interpreted as aiming to limit the number of rate hikes while pushing the effects of rate increases through quantitative tightening. Quantitative tightening is regarded as a way to raise market interest rates.
Daly also said, "If quantitative tightening is implemented, we will be able to observe its effects on the housing market and broad economic sectors. After that, additional rate hikes can be made."
However, Daly does not have voting rights at this year’s FOMC regular meetings, and most hawkish members do have voting rights, so it is difficult to be certain that her views will be reflected in policy.
She stated that inflation is not temporary and, regarding the possibility of uncontrollable inflation rising to 1970s levels, she said, "I am less worried than others." She also predicted that inflationary pressures will decrease once COVID-19 disappears.
She further anticipated that a vicious cycle where wages push prices higher will occur.
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