Key insights
- Fed's Daly highlights uncertainty, advocating a scenario-based approach to monetary policy. She outlines two scenarios: a quick resolution of the Middle East conflict with muted economic impact, and a protracted conflict leading to higher inflation and slower growth. Daly emphasizes flexibility and avoiding overly specific forward guidance due to the uncertain environment. The impact on US equities is slightly negative, reflecting increased uncertainty and potential for policy errors.
Investing.com -- Federal Reserve Bank of San Francisco President Mary Daly said Monday that when uncertainty is elevated, considering scenarios is more useful than debating a modal outlook.
Daly outlined two possible paths for the economy. In one scenario, the conflict in the Middle East resolves quickly, oil and energy prices fall, and the impact on the U.S. economy is short-lived and muted. Under those circumstances, it likely would make sense to look through the temporary rise in energy prices, assuming inflation expectations remain well anchored.
However, if the conflict becomes more protracted, a different scenario is possible. Disruptions in energy supply and associated cost pressures could persist, with increased risks for higher inflation, slower growth, and a weaker labor market. This would amplify the current tradeoffs for monetary policy, making it harder to balance the risks to both sides of the Fed’s dual mandate.
Regarding the outlook for monetary policy, Daly said there is no single most-likely path. With policy in a good place, the Fed needs to remain flexible and able to respond to rapidly evolving risks.
Daly acknowledged that this approach may seem vague. She explained that offering too much forward guidance in an uncertain world risks conveying a false sense of certainty, reducing rather than improving transparency, and making it harder for the public to clearly predict how the Federal Open Market Committee will react.
The Fed official said that recognizing the uncertainty, examining potential scenarios, and staying focused on restoring price stability and supporting full employment no matter how the economy evolves is optimal communication and appropriate policy.
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