Fed's Daly says aiming for 'sustained' above-target inflation

San Francisco Federal Reserve Bank President Mary Daly on Tuesday said the US central bank will need to stick with easy policy during what's likely to be a "protracted" recovery from the coronavirus crisis if it is to bring the economy back to full employment and reach its inflation goal.

"Hitting or exceeding 2 percent inflation for a few months does not mean victory," Daly said in remarks prepared for delivery at a virtual Arizona State University luncheon. "To fully achieve the goal of price stability, we need to see a sustained period of moderately above-target inflation. Only then will the job be complete."

Daly's remarks underscore the Fed's new way of doing business - rather than aim for a specific level of unemployment and raise interest rates to head off unwanted inflation before it arrives, the central bank now plans to keep rates low until inflation gets above, and stays above, its 2% target.

With COVID-19 cases surging, the Fed's first priority will to be help bridge economic disruptions by keeping rates near zero and providing emergency lending when needed, she said.

But with several vaccines expected to be approved for emergency use in coming weeks, the Fed's commitment to its new longer-term framework could be tested as soon as the middle of next year. At that point, the economy could surge back, pushing up prices at least temporarily, even as millions of Americans continue to struggle to find work.

"A full and true recovery from COVID-19 will most likely be protracted. And it will be tempting, as time passes, to think that monetary policy has done all that it can," Daly said.

But, she said, "even when progress is gradual the central bank can, with commitment, bring inflation sustainably to target."