San Francisco Federal Reserve Board Chair Mary Daly poses at the bank’s headquarters in San Francisco, California, U.S., July 16, 2019. REUTERS/Ann Saphir/File Photo

Feb 23 (Reuters) – San Francisco Federal Reserve Board Chair Mary Daly said on Wednesday she expects the U.S. central bank to raise rates at least four times this year, and likely more, to prevent high inflation from getting worse.

“There is a broad consensus that inflation is too high and the policy rate is too low,” Daly told the World Affairs Council and Los Angeles City Hall, given that the economy creates jobs and grows stronger. The geopolitical situation with Ukraine and Russia adds to the uncertainty, she said, but does not disrupt the Fed’s plans to take off in March.

“Raising rates at least four times – at least – would be my preference, but it will most likely take more than that” to bring demand back in line with supply – unless consumer demand falls more than it does. foresees it, or that supply chains be repaired faster than it had anticipated.

Once the Fed begins to raise rates, she said, it will then begin to reduce its balance sheet by $9 trillion, a process that will further tighten policy and work to slow inflation. Financial conditions are now more accommodative than they should be given the strength of the economy, she said.

Daly has always been among the dovish of Fed policymakers, and until Wednesday had not signaled that she saw the need for a series of four or more rate hikes.

“We have to demonstrate to the American people that we are committed to this not being a perpetual spiral,” Daly said.

At the same time, she said, raising rates doesn’t mean the Fed is stepping on the brakes, but rather allows economic growth to continue by dampening inflation.

“The last thing you want is an economy that’s going too fast, outpacing what’s possible, and then you have to put the brakes on it, but that’s not where we’re at,” she said. . “We are shifting intense COVID-related support to gradually raise the policy rate and get that policy accommodation at the right size for the economy we have.”

Among the data she will monitor, she said, are the transition of the COVID-19 pandemic to an endemic state; how quickly disrupted supply chains recover; how quickly workers sidelined by COVID-19 are returning to the labor market; and how quickly the fiscal support that has supported the economy’s recovery from the pandemic shutdowns is fading.

TRANSPARENCY

Inflation according to the Fed’s preferred gauge, the personal consumption expenditure (PCE) price index, rose 5.75% last year, the highest in about 40 years and more than double the Fed’s 2% target.

The Fed’s ability to communicate its inflation-fighting intentions and thereby shape inflation expectations will prevent an upward price spiral from taking hold as it did in the 1970s, Daly said. .

At the time, she said, the more prices rose, the more people expected them to continue to rise, and the Fed — as was its wont — offered little guidance on what to expect. she would in response. The Fed would have policy meetings, but didn’t even announce its decisions afterward.

This silence, she said, allowed the situation to snowball: inflation continued to rise until the Fed made a series of sharp interest rate hikes that pulled back but also sent the economy into recession.

Since then, she says, things have changed — not just in the economy itself, but especially with the Fed’s approach to communications. The central bank now has an inflation target of 2% and an explicit framework for adjusting its policy to achieve its objectives; it publishes forecasts from Fed policymakers, and policymakers like Daly regularly come out and give speeches on their views.

This transparency, she said, has stalled inflation expectations despite the current rise in actual inflation, potentially reducing the need for the kind of aggressive action needed decades ago.

“Greater transparency and a firm commitment to our goals assures Americans that periods of high inflation or unemployment will not last forever; that there is an end in sight.”

Reporting by Ann Saphir; edited by Diane Craft

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