Fed’s Daly on stock market gains: Maybe we’ve taught people ‘expansions do not die of old age’ - MarketWatch

The recent run-up in the stock market is not a concern and may simply reflect improved optimism about the outlook for the U.S. economy’s expansion that is now in its 11th year, San Francisco Fed President Mary Daly said Wednesday.

Asked in an interview on CNBC if she was concerned about the high level of the stock market, Daly said her business contacts are more optimistic at the start of this year than they were for much of last year. Plans to expand that had been on the shelf are now getting underway, she added.

“We may have finally reached the point where we’ve taught people that expansions do not die of old age,” she said.

The Dow Jones Industrial Average DJIA, +1.68% has been up a little over 1,000 points in the past two trading sessions.

The Fed cut its benchmark rates in three quarter-point moves over the last six months of 2019, bringing it down to a range of 1.5% to 1.75%.

Daly, who is not a voting member of the Fed’s interest-rate committee this year, said policy was appropriate given the uncertainties in the outlook.

The San Francisco Fed president was dovish about the outlook for interest rates.

Daly said she wanted the Fed to experiment and see how low the unemployment rate can go before inflation turns higher, a juncture called “full employment” by economists.

The Fed has previously estimated that a 4.1% unemployment rate could be “full employment.” But this has been called in question because the unemployment rate has been below the 4.1% level since March 2018 and wage growth and inflation have remained subdued. The unemployment rate is now at 3.5%.

“I think we need to learn what full employment is experientially,” Daly said. She noted that the Fed has not been able to hit its 2% inflation target over the past several years.

“We’re missing on our inflation goal and it looks like the labor market has room to run,” she said.

In the past, the Fed has often stopped short of full employment and raised interest rates, saying it didn’t want to go too far because it might overheat the economy and cause inflation pressures to mount quickly. Some of Daly’s colleagues, notably Boston Fed President Eric Rosengren, are worried about that now.

Read: Fed should look out for risks, including inflatin, Rosengren says

Daly downplayed worries about the economic impact of the coronavirus.

While the deadly virus might depress China’s economy for a few quarters, this would likely be followed by a bounce-back in economy activity, she said.

The impacts on the U.S. economy would follow a similar pattern but be more limited, she added.

“Right now, I am not looking for this [virus] to do anything material to our economy,” Daly said.

She forecast the economy would grow at 2% annual rate “or a little faster” annual rate in 2020, down only slightly from 2.3% last year.

2020-02-05 21:15:00Z
https://www.marketwatch.com/story/feds-daly-on-stock-market-gains-maybe-weve-taught-people-expansions-do-not-die-of-old-age-2020-02-05