Fed knows how to fight inflation, will seek to do so ‘gently’ -Daly

Oct 4 (Reuters) – San Francisco Federal Reserve Bank President Mary Daly said Tuesday the Federal Reserve has the tools and knowledge to bring down high inflation and will use them even if it does trying to find the “smoothest” way to do this.

There is “plenty” of room for the Fed to use higher interest rates to reduce demand and ease pricing pressures, Daly said at a Council on Foreign Relations event in New York City, noting that about half of what causing the current high inflation is a product of excess demand.

“If we’re doing our job well and telling the public why we’re doing what we’re doing and why the interest rate path we’re taking is necessary to bring inflation down and that price stability is extremely important to us, how does it do it.” as gently as possible to get the economy back into balance as easily as possible – whatever that looks like, we’re going to take the easiest route we can find,” said Daly.

Polls show Americans don’t expect inflation to stay high over the long term, she said, and these anchored inflation expectations are evidence Americans already trust the central bank. “I think confidence goes up when inflation goes down.”

The Fed has been raising US interest rates faster this year than in decades to fight inflation, which is also more than triple the Fed’s 2% target. The precipitous rise in the Fed’s interest rates – to 3.00-3.25% and likely to 4.6% next year – has contributed to global market movements and falls in most currencies against the dollar, putting pressure on them in many countries Central banks has increased their own borrowing costs.

Daly said the Fed is watching the impact of dollar appreciation and rising US interest rates on global growth, as a slowdown in growth abroad could have repercussions on the domestic economy.

“When Europe goes into recession, it’s a headwind; when China stalls, it’s a headwind for our growth and we need to take that into account so we don’t overstretch the policy,” she said.

Likewise, the Fed must take into account that other central banks are also raising their own interest rates to lower inflation in their own countries, which is tightening global financial conditions.

Still, she said, achieving US price stability and full employment is the Fed’s mandate, and that’s what the Fed is focused on.

Despite the recent volatility in markets over the past few weeks, she said, “We still have a healthy, stable financial system.”

Reporting by Ann Saphir and Michael S. Derby; Editing by Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.