A top Federal Reserve official has warned the spread of the Delta coronavirus variant and low vaccination rates in some parts of the world poses a threat to the global recovery as she urged caution in removing monetary support for the US economy.
“I think one of the biggest risks to our global growth going forward is that we prematurely declare victory on Covid,” Mary Daly, the president of the Federal Reserve Bank of San Francisco, said in an interview with the Financial Times.
“We are not through the pandemic, we are getting through the pandemic.”
Daly, who is a voting member of the Federal Open Market Committee this year, pointed to the struggles to contain the virus in Japan and other countries. Surging infections and lagging inoculation campaigns abroad were constraining the economic rebound and could have negative ramifications for the US, she said.
“If the global economy . . . can’t get . . . higher rates of vaccination, really get Covid behind [us], then that’s a headwind on US growth,” Daly said. “Good numbers on the vaccinations are terrific, but look at all the pockets where that isn’t yet happening.”
Daly’s warning came as investors sought out safe havens in droves this week, sending US government bond prices soaring. Treasury yields have fallen sharply as a result, with the benchmark 10-year note trading at its lowest level since February. Global stocks fell on Thursday.
Many market participants attributed the sharp drop in Treasury yields to technical factors. But a growing chorus has expressed concern that the economy will struggle to maintain the red-hot growth rates that have accompanied the reopening to date, and predicted that the recent jump in inflation will quickly fall away.
“In the United States the news has been pretty positive, but the global news hasn’t been all that positive,” Daly said. “It’s been good but it hasn’t been terrific. Markets respond to those things, and that can of course lower yields because they’re pricing in the risk there.”
She added: “What you’ve seen is an increasing sense of the downside risk to the global economy.”
The Fed’s June meeting appears to have been a catalyst for recent market moves. Central bank officials predicted they would be raising interest rates sooner and more aggressively than they had forecast earlier this year.
But speaking to the FT, Daly — who is considered one of the more dovish Fed officials — said there should be no doubt that the central bank would stick to the monetary policy framework it adopted in August 2020. This promised a more lenient approach to temporary overshoots in inflation in the pursuit of full employment.
“Chair [Jay] Powell said this so clearly in his press conference and I think that’s the light to follow here,” Daly said. “That’s the message I keep saying: we’re fully committed to our framework. That means eliminating shortfalls in employment and delivering average inflation of 2 per cent, and that is still absolutely paramount.”
Daly’s comments come at a pivotal time for Fed policymaking, as it discusses removing some of the massive monetary support for the recovery introduced at the start of the pandemic.
Minutes from the June FOMC meeting, released on Wednesday, showed some policymakers believed the Fed could soon start trimming its $120bn per month of asset purchases. But while Daly said the debate around “tapering” was warranted, the central bank had to “keep our eye on the long-term goals, which are full employment and price stability, and really be patient enough and persevere enough to deliver on those commitments which we’ve made to the American people”.
Furthermore, Daly argued increasing interest rates from their current level close to zero would have to wait until after the asset purchases had been wound down. Other more hawkish Fed officials have suggested there could be some overlap.
“We’re ready to taper at the appropriate time,” she said. “Then I’d like to see, how is that going? How does the economy respond to that? Because we can forecast, we can project, but we need to know in order to actually say, ‘oh, OK, now it’s time to move on to the next phase’, which is discussing policy normalisation and the fed funds rate coming up a bit.”
Daly said the split among Fed officials on how quickly to remove support for the economy, which was revealed in the minutes, was healthy as officials brought their “different perspectives” to the table and were not operating in an “echo chamber”.
For her part, the San Francisco Fed president indicated she is not quite ready to move to a post-pandemic environment.
“I think there’s always this excitement that ‘Oh my gosh: look, the vaccinations are working, this could be the end’. But it would be premature to say that we’ve achieved a victory here.”