San Francisco Fed President Mary Daly said Monday it’s premature to take another 75-basis point rate hike off the table ahead of the central bank’s December policy meeting.
“It’s premature in my mind to take anything off the table,” Daly said when asked during a media Q&A whether a 75-basis point rate hike is still possible for the next policy meeting if forthcoming inflation reports came in hot. “I’m going into the meeting with the full range of adjustments that we could make on the table and not taking off prematurely.”
Daly reiterated she still sees the need to raise the Fed’s benchmark interest rate to a range of 4.75%-5.25%, but added the caveat that nothing is set in stone. The Fed funds rate is currently set in a range of 3.75%-4%.
Daly said she doesn’t feel it’s appropriate to make policy based on one data point, as the consumer price index showed signs of cooling last month.
“It’s way too early to cause a turning point on inflation,” Daly told reporters. “One month does not a victory make. It doesn’t give me comfort. We will need more good months of data before call this a turning point."
On the flip side, Daly also warned of the risk of overtightening and raising interest rates too much by ignoring the gap between the Fed’s policy rate and what financial markets have priced in.
“As we make decisions about further rate adjustments, it will be important to remain conscious of this gap between the federal funds rate and the tightening in financial markets,” Daly said in a speech in Irvine, California. “Ignoring it raises the chances of tightening too much.”
Daly says while the official range on the fed funds rate is between 3.75%- 4%, financial markets are acting like it is around 6%. She says that higher level incorporates forward guidance and the balance sheet runoff, and is something she considers another data point when trying to make decisions on setting policy.
Daly said overlooking the lag time in policy — the time it takes for monetary policy to filter through the economy — can make the Fed think it has further to raise rates when the Fed needs to wait for earlier actions to work their way through the economy.
Daly said the Fed will not be “heedless” when it comes to raising rates and will remain mindful of the lag in monetary policy and the cumulative effect of raising rates.
“This is especially important as we move into the next — and in many ways more difficult — phase of policy tightening,” she said.
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