Exclusive Report - Federal Reserve's Daly says a rate hike may be necessary, but it is not urgent

The last two paragraphs add further commentary on transparency and the Fed’s reaction function

Ann Saphir

Reuters San Francisco, October 15 - Mary Daly, President of the Federal Reserve Bank of San Francisco, said on Wednesday that the Fed may need to further raise short-term interest rates to curb excessive inflation, but suggested that such a move is not necessary at the Fed’s October 27-28 meeting.

“It’s quite likely we will need further adjustments, but for me, the exact timing of those adjustments is something we are still deliberating,” Daly said in an exclusive interview with Reuters. “I don’t think we have to rush to a decision with limited information. I think we have enough time.”

Several of Daly’s colleagues (link) have also suggested in recent weeks that the Fed is unlikely to raise rates this month. The Fed’s policy rate is currently in a range of 3.75%-4.00%. Longer-term borrowing costs are even higher—some, such as the 7.5% mortgage rate, are dampening demand in certain areas of the economy.

Daly said she believes financial markets understand the Fed’s “reaction function”, noting traders’ response to data earlier Wednesday: figures showed that for the twelve months ending in September, consumer price inflation (link) accelerated to 3.7%, slightly higher than economists had expected. The Fed targets a related measure to keep inflation at 2%.

Although she said the initial reaction (link) was “strong”—with rate futures traders quickly betting on a Fed rate hike in October—investors “calmed down” after closer analysis. The rise in headline inflation was driven by higher gasoline prices, while core inflation, though sticky, did not post a sharp increase.

“There’s no doubt this data shows inflation risks remain elevated,” Daly said. “Inflation risks have indeed risen, but risk is not reality, and in my view, acting on risk alone when there is still time to make wise decisions is unwise.”

Daly said the continued stability of the labor market gives the Fed room to focus on price stability.

But she added: “Since there’s no need to rush, why force a sense of urgency? Why not take time to think things through and make prudent decisions? And we have more meetings ahead of us.”

Current financial market pricing shows there is about a 40% chance the Fed will deliver a second consecutive rate hike at its next meeting—a higher probability than before the data’s release, but no longer treating a hike as the most likely outcome as markets did shortly after the inflation report.

She said markets “understand we are committed to price stability, and we will do whatever it takes to achieve that goal.”

She said policymakers “have a duty to communicate effectively with the public and be accountable, transparent, and clear.” “Our responsibility is to state our goals clearly to the public, what we are accountable for, and how we will balance various risks.”

(To assist non-native English speakers, Reuters has automated the translation of this report into several other languages. Because automated translation may be inaccurate or lack necessary context, Reuters does not guarantee the accuracy of automated translations, which are provided solely for readers’ convenience. Reuters accepts no responsibility for any harm or losses arising from use of automated translation.)