“Well, the data happened”
A telling interview from Mary Daly on Friday.
Mary Daly, President of the San Francisco Fed District (nearly a quarter of U.S. GDP, 23.5%), was interviewed by Bloomberg on Friday. In it, she emphatically said that economic data was what changed her opinion since September, not planned policies from the new administration.
Jonathan Ferro [Bloomberg]: Let’s start with the forecast. Some controversy around the forecast. I’ll go for the controversy. We don’t speculate, we don’t assume, we don’t guess and then a month later, it felt like there was some speculation and some guessing about policy next year. I just want to talk about your approach to the forecast. Was it about the data for you or was it about the incoming administration?
Mary Daly: Its about the data. It’s always about the data for me. We don’t know what the incoming administration is going to do. You know, new administrations, no matter when they come, always put a slate of programs together, and really, as a policy maker, I want to see the net-net of that; once I see clarity of what those policies will be. So, I was focused on the incoming information and what it means for the outlook. And today, I feel like we have policy in a good place, the economy is in a good place, and we are prepared for whatever comes before us.
Lisa Abramowicz [Bloomberg]: What happened in the past three months that caused the Fed, and perhaps yourself, to be much more concerned about the stickiness in inflation?
Mary Daly: Well, the data happened. And you look at the data and what’s happened is that…There are two things that have occurred. First of all, the economy remains in a good place and the risks to the outlook are equally balanced between the risks to inflation or a risk to employment. That is where we wanted our goals to be and we adjusted policy when we had confidence that inflation was heading down and we adjusted policy some more to make sure we have a balanced labor market that continues. So that’s where we are. But then the data on inflation have been coming in a little slower. I wouldn’t even say sticky or stalled, I would just say the progress has just slowed relative to what we had wanted, but that’s a typical pattern. It is bumpy as you get from 2.5% or 2.8% to 2%, it is just a bumpy path.
The surge in economic data (real and inflation) since August is the primary reason why the Fed is hawkish. The path of data going forward will determine how fast or slow the Fed cuts rates. Given the phase of the business-cycle we are in (near the end of the expansion), I expect for data to start weakening again as higher rates have seeded the next phase down of economic data a few times now. There is nothing different now.
Economic data has stalled out for nearly two months now (see chart below.) It may take a little while for the Fed’s lagging hawkish narrative to permeate sentiment and for negative data to become clearer into January, but I don’t think there is much further upside for interest rates.
