San Francisco Federal Reserve President Mary Daly stated that while U.S. inflation is expected to gradually decline, the current economic outlook remains subject to significant uncertainty. Should inflation persist above expectations, the Federal Reserve may need to adopt more proactive policy measures.
Speaking at an event in Santander, Spain on Thursday, Daly noted that current Fed monetary policy remains at a slightly restrictive level, which should help drive a gradual easing of inflation. She pointed out that this spring, U.S. military action against Iran, combined with rising tariffs and oil prices, jointly increased inflationary pressures. However, with the U.S. and Iran reaching a ceasefire agreement, international oil prices have retreated significantly, providing a positive signal for easing inflation.
"The decline in oil prices gives us hope for alleviating inflationary pressures," she said. Yet, she simultaneously emphasized that it remains difficult to predict how the U.S. economy will evolve, and the Fed needs to prepare for various scenarios. She indicated that if inflation continues to exceed target levels, the Fed may need to implement more aggressive policy actions to ensure price pressures are controlled.
Last month, the Federal Reserve held the target range for the federal funds rate steady at 3.5% to 3.75% for the fifth consecutive time. However, the latest published interest rate dot plot revealed that among the 18 policymakers, nine anticipate at least one more rate hike this year, reflecting a growing concern within the decision-making body over persistently high inflation.
Data shows that the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, rose 4.1% year-over-year in May, reaching its highest level since April 2023 and remaining above the long-term 2% target for over five consecutive years.
Concurrently, signs of cooling are emerging in the U.S. labor market. Data released Thursday showed that U.S. job growth slowed significantly in June, with employment in the leisure and hospitality sector posting its largest decline since 2020.
Discussing the Fed's future policy framework, Daly expressed support for researching new economic analysis methods and a willingness to explore more modern data assessment systems, but she stressed that the Fed will not alter its dual statutory mandates of achieving maximum employment and price stability.
"We will not change the goals, but we will continue to learn and improve, hoping to do better tomorrow than we did today," Daly said.
It is worth noting that since Kevin Warsh assumed the role of Federal Reserve Chair in May, multiple specialized working groups have been established. These groups are tasked with evaluating issues such as economic data application, policy communication, the balance sheet, productivity, and the inflation framework, aiming to advance further reforms within the Fed's policymaking system.
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