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Fed's Daly (2027 voter) says businesses cautiously optimistic; consumers nervous about economy, but spending; those are strong pillars

Fed's Daly indicates a cautious outlook on the economy, highlighting consumer spending despite nervousness and emphasizing productivity as a compensatory factor for slow labor growth.

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Fed's Daly (2027 voter) says businesses cautiously optimistic; consumers nervous about economy, but spending; those are strong pillars

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  • Outlook depends on how long climb in oil prices, how long conflict will persist.
  • Heading toward zero labour force growth based on demographics.
  • Zero job growth might be new steady state.
  • Right now making up low labour force growth by higher productivity growth.
  • Absence of immigration really matters, as does investment in technologies.
  • A lot of room to boost labor force participation.
  • Hard to tie increase in productivity growth to real neutral rate, but it's something to watch on both sides.
  • Productivity growth can help with disinflation, but not something we can count on.
  • Oil shock probably has more of an inflation effect than growth effect.
  • Right now too early to know if oil shock is short-run shock or persistent; it depends on duration of conflict; if it ends soon, we are back on the path of interest rates that we were; if conflict persists, more inflationary pressure for a longer time.
  • Fed funds are slightly restrictive now, just above 3% neutral.
  • Before oil price shock, felt one or two cuts in 2026 would be needed.
  • At this point, looking to see if higher oil prices spill into other goods and services prices.
  • In wait and see mode, nice place to be.
  • Could leave rates where they are; if inflation took off would need to raise rates; if conflict ends quickly could cut.
  • As bank capital requirements change, reserve demand could fall, Fed's balance sheet could ask shrink.
  • Commercial real estate is no longer in my list of worries.
  • Warsh will hold to the responsibilities of the Fed chair job.
  • Fed and Treasury's relationship has changed over time.
Context

Her comments suggest a nuanced approach to future rate adjustments, dependent on oil prices and geopolitical stability; if inflation pressures mount from rising oil prices due to ongoing conflicts, the Fed may need to raise rates, whereas a quick resolution might lead to cuts as conditions stabilize.

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