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Fed's Daly (2027 voter, dove) says there are at least two possible paths for the US economy

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Fed's Daly (2027 voter, dove) says there are at least two possible paths for the US economy

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  • In one, 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.
  • But 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 our dual mandate.
  • There is no single most-likely path. With policy in a good place, we need to remain flexible, able to respond to rapidly evolving risks.
  • 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 FOMC will react.
  • 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.

Context

Fed's Daly, a notable dove, outlines two possible economic scenarios tied to the Middle East conflict. If the situation resolves quickly, inflation may remain anchored, allowing for a more lenient policy approach. However, extended conflict could lead to supply disruptions and heightened inflationary pressures, complicating the Fed's dual mandate and necessitating a flexible response to evolving risks.

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