Mary Daly became the latest Federal Reserve official to raise the prospect of the Federal Reserve slowing the pace of its rate hikes to a quarter-point increase next month, despite policymakers supporting the policy rate above 5 percent.
San Francisco Fed President Daly said on Monday that while it’s “really too early to declare victory over inflation,” the central bank is considering raising interest rates by 0.25 percentage points if officials agree later this month next time meet.
That would mean a step down from the half-point hike the Fed introduced in December and a return to a more typical pace of monetary tightening for the central bank. The Fed delivered a historic series of 0.75 percentage point hikes as it struggled to tame price pressures after underestimating the inflation problem last year.
Asked in an interview with the Wall Street Journal Monday whether she supports a quarter-point or half-point rate hike for the next rate decision, Daly said it “can be argued for either.”
“It’s really about incoming information,” she said, adding that the Fed is “completely data dependent” when assessing how much further monetary policy should be tightened. Daly said she still believes the fed funds rate needs to get above 5 percent to bring inflation down, but how far above that level is “not entirely clear.”
Daly’s comments echo those of other regional presidents, including St. Louis Fed’s James Bullard and Atlanta’s Raphael Bostic. Both said the Fed still had more to do to dampen demand and the data would determine whether the central bank could act at a more measured pace as it nears its so-called final rate.
Richmond Fed President Thomas Barkin said last week that “as we work to lower inflation, it makes more sense to steer more consciously” and suggested support for a slower rate hike.
According to individual forecasts released in December, most officials support funds peaking at between 5 percent and 5.25 percent. It is currently moving between 4.25 percent and 4.50 percent. Minutes of the last 2022 meeting, released last week, also showed that no policymaker supported rate cuts through 2024, a message officials recently reiterated.
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Traders in the US fund futures market expect the Fed to opt for a quarter-point rate hike in February and not raise interest rates above 5 percent. They are also betting that the Fed will reverse course and cut rates by the end of the year.
Speculation of a less aggressive Fed has increased as economic data has improved showing less intense inflationary pressures and a softening labor market. The December consumer price index report will be released on Thursday.
Daly said she pays most attention to services inflation, which she believes is the best indicator of underlying price pressures once food, energy and housing costs are deducted.
Those costs, which are directly linked to the labor market, have shown “no point” in slowing down, she said.