Fed seeks balance as recession fears heat up

‘Monetary policy is working,’ San Francisco Fed CEO says

What you probably already know: All eyes are on the Fed right now as economists try to predict whether the economy is headed into a recession. Mary Daly, the CEO of the Federal Reserve Bank of San Francisco, spoke Monday morning at the Commonwealth Club World Affairs of California about the current economic picture, including the decline in inflation, labor force growth and how an improved supply chain is resulting in a stronger economy. While unemployment is up slightly, things have improved since the pandemic, Daly said, without significant disruption of the labor market.

Why? “Monetary policy is working,” she said, “but we need to finish the job.” She suggested that we may see companies cut back on hiring, something that would trigger the Fed to lower rates. But, if inflation falls slower than predicted, the Fed will likely hold rates higher for longer. Some economists are predicting the Fed will lower rates as early as July, now that there are hints of a recession.

What it means: If the Fed keeps things tight for too long, it could spark a recession. This would result in more job cuts, which, in turn would likely impact the November presidential election. Generally, the Fed tries to avoid substantial rate cuts in election years, but does often make smaller adjustments to keep the economy in balance.

What happens now? The Fed’s goal, Daly said, is not just avoiding a painful recession, “but balancing policy to protect full employment while restoring price stability.” The public has trust in the Fed to properly manage the balance between inflation and jobs, she said.

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