Fed's Daly calls for 'patience,' says too-low inflation costly

FILE PHOTO: San Francisco Federal Reserve Bank President Mary Daly poses at the bank’s headquarters in San Francisco, California, U.S., July 16, 2019. REUTERS/Ann Saphir

(Reuters) - San Francisco Federal Reserve President Mary Daly on Tuesday pushed back against the fear that easy Fed policy could bring on unwanted inflation, arguing that with inflation too low and millions of Americans still out of work, monetary policy must remain accommodative “for some time.”

“Our most important virtue will be patience,” Daly said in remarks prepared for delivery to the Economic Club of New York. “We will need to continually reassess what the labor market is capable of and avoid preemptively tightening monetary policy before millions of Americans have an opportunity to benefit.”

Optimism over a sharp drop in COVID-19 infections since January, the U.S. approval of a third vaccine against the scourge, and progress toward passage of a $1.9 trillion pandemic relief package in Congress have led many Wall Street economists to upgrade their economic growth expectations for this year.

That in turn has raised alarm bells in some quarters over the possibility of a surge in inflation that would force the Fed to reverse course to tamp it down.

Such a “fearful swirl,” Daly suggested Tuesday, is based on the outdated idea that falling unemployment inexorably pushes up on wages and prices. Though true in the 1970s, she said, the links are much weaker today. Runaway inflation is not imminent, she said; the bigger risk is from too-low inflation, and it will “likely be some time before inflation is sustainably back to 2%.”

Recent signs of rising inflation expectations are encouraging, she said, and show that market participants believe the Fed will stick to its plan to offset the current period of low inflation.

Reporting by Ann Saphir; Editing by Andrea Ricci