Exclusive Report - Federal Reserve's Daly says rate hikes may be needed, but there is no urgency

From the third paragraph, more commentary and background information has been added

Ann Saphir

Reuters San Francisco, October 14 - Mary Daly, President of the Federal Reserve Bank of San Francisco, said on Wednesday that the Federal Reserve may need to further raise short-term interest rates to curb excessive inflation, but also suggested there was no need to take this action at the Fed’s October 27-28 meeting.

“It’s quite possible we’ll need to adjust further, but for me, the specific timing of these adjustments is something we are still discussing,” Daly told Reuters in an interview. “I don’t think we have to rush decisions with limited information. I think we have enough time.”

Several of Daly’s colleagues have also signaled in recent weeks that a rate hike by the Fed this month is unlikely. The Fed’s policy rate is currently in a range of 3.75% to 4.00%, while long-term borrowing costs are even higher, with some costs—such as the 7.5% mortgage rate—having an increasingly obvious dampening effect on demand in certain areas of the economy.

Daly said she believes financial markets understand the Fed’s “reaction function,” noting traders’ responses to data earlier on Wednesday: figures showed that in the 12 months through September, consumer price inflation accelerated to 3.7%, slightly above economists’ expectations. The Fed targets a 2% inflation rate using another, different but related, indicator.

She said that although the initial response was “strong”—rate futures traders quickly bet on an October hike—the investors “calmed down” after carefully analyzing the data. Rising gasoline prices had pushed up headline inflation, while core inflation, though still persistent, did not see a sharp rise.

“There’s no question that this data shows inflation risks remain high,” Daly said. “The risks of inflation have indeed increased, but risk is not reality, and taking action merely because of risk, when you have the time to make a wise decision, is unwise in my view.”

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 the time to think deeply and make prudent decisions? Plus, we have more meetings ahead.”

Current financial market pricing shows that the probability of the Fed raising rates for a second consecutive time at the next meeting is about 40%. Although this probability has increased since the data was released, the market no longer sees it as the most likely outcome.

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