The economy still has a "long way" to go before the Federal Reserve will begin pulling back on near-zero interest rates and its $120 billion-a-month bond purchase program, San Francisco Fed President Mary Daly said Tuesday at a virtual appearance at the Economic Club of Minnesota.

While the Fed has an optimistic outlook on the economy, she noted that there have been only a couple of months of "really good data."

"There's also a big hole to dig out of," she said, pointing to the 8.5 million workers in the U.S. who remain on the sidelines.

"We're a long way from achieving our full employment and price stability goals, so it's not really the right time to start talking about [rate] normalization," she said.

Her comments came a week after the Fed's rate-setting committee, on which she has a vote this year, decided to maintain very low interest rates. Fed officials also brushed aside concerns about growing inflation, saying they believed it will be temporary, an assertion that Daly reiterated on Tuesday.

But also on Tuesday, Treasury Secretary Janet Yellen said in taped remarks that U.S. interest rates may have to rise modestly to prevent the economy from overheating due to the investments President Joe Biden is proposing in infrastructure and the labor force. She added that those investments will help the economy recover faster and reverse decades of widening economic inequality.

The Treasury Department doesn't have any control over setting interest rates, however. That is the responsibility of the Fed, which Yellen chaired from 2014 to 2018.

Yellen's comments did not come up during Daly's conversation with Minneapolis Fed President Neel Kashkari. But Kashkari did ask her how worried she was about high inflation.

"How will you know if high inflation readings are transitory or permanent, and should we be worried about a repeat of the 1970s?" Kashkari asked her, referring to the period of high inflation in that decade.

First, Daly noted that we're talking right now about inflation of 2.4% to 2.6% — not 13%. That is not that big a leap compared to the Fed's goal of keeping inflation at 2%.

She added that the economy is starting to recover, spurred in part by vaccines.

"We're seeing demand really pick up fast," she said, noting that people are eating at restaurants, going shopping, and heading out on vacation more. "But it takes awhile for firms to ramp up their supply."

As a result, that will push prices up temporarily, she said.

Daly did not provide a timeline for when the central bank might raise interest rates. But Fed Chair Jerome Powell has said it's unlikely to do so this year.

When the Fed is ready to begin tapering back support, Daly said it will likely start with pulling back on its asset purchase program first before it lifts interest rates, the latter of which she called the Fed's "best tool" where it gets the "biggest bang for its buck."

"But again, a long way from doing those things," she said.

Kavita Kumar • 612-673-4113

Twitter: @kavitakumar