Federal Reserve Bank of San Francisco President Mary Daly said the neutral interest rate could be higher now than before the pandemic, though rates would not stay as high as they are now indefinitely.
“5% is not going to be the new neutral. There’s no evidence that that will be the new neutral — that’s still the policy rate trying to fight back high inflation,” Daly said Tuesday at a town hall event in Chicago, coordinated by the Chicago Council on Global Affairs.
“I completely could imagine that we go from 2.5 — anywhere between 2.5 and 3 as the nominal neutral,” she said. “But that’s 50 basis points, not 250 basis points.”
The US economy has shown surprising resilience in the face of the Fed’s aggressive rate-hiking campaign, which took the target range for its benchmark interest rate to 5.25% to 5.5% from nearly zero in less than two years.
That resilience has prompted speculation that the so-called neutral rate for the economy, which Fed officials have estimated at 2.5% since before the pandemic, may have risen.
For now, the central bank is trying to decide whether it needs to hike again in 2023 after leaving its benchmark unchanged at the last policy meeting in September.
Daly, who doesn’t vote on rate decisions this year, is among Fed officials signaling that tighter financial conditions driven by a recent surge in US Treasury yields may reduce the need for more rate hikes. Yields on 10-year Treasury securities have risen about 25 basis points since the September meeting.
“Recently, bond yields have tightened, meaning financial conditions have tightened,” Daly said Tuesday. “If that’s tight, maybe the Fed doesn’t need to do as much. That’s why I said, depending on whether it unravels, or whether the momentum in the economy changes, that could be equivalent to another rate hike.”
Futures markets are showing a less-than-20% chance of another quarter-point increase when Fed officials next meet on Oct. 31-Nov. 1.
