Fed's Daly favors waiting to gain confidence that inflation is dropping

San Francisco Fed president Mary Daly said uncertainty about the inflation outlook has increased and made it difficult to make projections for policy until the central bank gets more clarity.

"Inflation is going to be a bumpy ride," Daly said Thursday during a conversation at George Mason University’s Mercatus Center.

There is "uncertainly about what the next few months of inflation will look like. The reaction isn’t to make more projections."

Instead Daly outlined two possible scenarios for the path of interest rates. One has inflation resuming its downward trajectory with a cooling job market, and in that case lowering rates would be appropriate.

The other scenario has inflation continuing to stall out as it has during the first three months of this year. If that happens, it would not be appropriate to cut rates unless the job market falters, she said.

Right now, Daly sees a healthy job market and inflation that remains too high. She said she believes policy is still restrictive, but that it might just take more time to bring down inflation.

Daly is the latest Fed official to underscore a careful, slow approach to setting interest rates, implying that the current rates will likely stay at their current levels for longer.

The Fed’s interest rate-setting committee decided last week to keep its benchmark rate in a range of 5.25%-5.50%, a 23-year high, at the conclusion of its two-day policy meeting.

The committee said in its latest policy statement that "in recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective."

Officials reiterated more clarity would be needed in the outlook for inflation returning to target before cutting rates.

Inflation has shown a lack of progress in the first three months of the year after a steady decline in the second half of last year.

"The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent," the statement read.

Other Fed officials this week have also shown they favor holding rates at current levels for longer.

New York Fed president John Williams said Monday that "policy is in a very good place [now] and we have the time to collect more, so steady as she goes."

Richmond Fed president Thomas Barkin said he is optimistic that current rates will be enough to eventually bring inflation down and that the Fed can afford to be patient due to a strong job market.

Minneapolis Fed president Neel Kashkari said Tuesday that he believes rates will likely need to be held at current levels for an "extended period" while Boston Fed president Susan Collins said it will take longer "than previously thought" to bring inflation down.

"Confidence bands were tightening up [last year], but the last three months confidence bands have widened out," Daly said Thursday.

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