BERKELEY, California (Reuters) – Slow inflation gives the Federal Reserve leeway to keep borrowing costs low and help draw more workers into the job market, San Francisco Federal Reserve Bank Mary Daly said Saturday.
FILE PHOTO: San Francisco Federal Reserve Bank President Mary Daly poses at bank headquarters in San Francisco, California, USA, July 16, 2019. REUTERS / Ann Saphir.
"We're lucky right now," Daly said at the University of California, Berkeley's Clausen Center Conference on Global Economic Issues. "We can keep the key policy rate accommodating, and we can both find full employment experience by waiting for it to show up in wage and price growth, and we can address the problem of dampened inflationary pressure and get ourselves back to the target."  Last month, the Fed lowered interest rates for the third time this year, to a range of 1.5% to 1.75%. Fed leader Jerome Powell has described interest rate cuts as an insurance policy against the drag from slowing global growth and geopolitical and trade uncertainty. The price reductions are also an attempt to counteract inflation that has remained stubbornly below the Fed's 2% target.
Meanwhile, the US economy continues to grow modestly, and unemployment, at 3.6%, is near low levels set decades ago.
Powell has said that the Fed is likely to leave prices barring some "significant" change in the economic outlook.
Daly Saturday did not talk directly about the Fed's recent interest rate cuts. But, she said, there is little evidence that low rates are creating costly imbalances in the financial markets, which is a concern of some Fed policy makers who have counteracted interest rates.
Financial conditions, she said, are generally stable, citing a Fed report released earlier this week.
Nor did Daly say, the hot job market seems to be hurting the economic potential in the longer term by encouraging young people to limit their education and future career prospects to take a job, she said.
By contrast, she argues, low prices seem to offer some benefits, which among other things improves the employment opportunities of African Americans and Latinos, who usually have higher unemployment rates than whites.
The U.S. unemployment rate in October registered 3.6%, slightly higher than last month, but still much lower than most economists believe is sustainable in the long term.
Daly's comments suggest a willingness to continue testing that belief and keep raising interest rates until she sees evidence of rising prices and wages that unemployment really reaches its lowest sustainable level.
"I am surprised that wage growth has not picked up any more," Daly said. "If we haven't seen the (low unemployment rate) push up wage growth more than it has, I don't think we have achieved full employment."
Reporting by Ann Saphir; Editing by Daniel Wallis