San Francisco Federal Reserve President Mary Daly said on Wednesday that the Fed will probably need to raise short-term interest rates further to curb excessive inflation. However, Daly signaled no need to raise rates at the October 27-28 meeting. Daly said the timing of additional adjustments remains under discussion. Daly said the Fed has time and need not decide urgently with limited information.
Several of Daly's colleagues have also signaled in recent weeks that the Fed is unlikely to raise rates this month. The Fed's policy rate is between 3.75% and 4.00%. Longer-term borrowing costs are even higher. Some borrowing costs, including mortgage rates of 7.5%, are increasingly restraining demand in parts of the economy.
Data released earlier on Wednesday showed consumer price inflation accelerated to 3.7% in the 12 months through September, slightly faster than economists anticipated. The Fed targets 2% inflation using a different but related measure. Higher gasoline prices drove the overall increase. Underlying inflation remained persistent but did not rise sharply.
Daly said financial markets understand how the Fed responds to economic developments, pointing to traders' response to Wednesday's inflation data. Daly described the initial market reaction as strong. Rate futures traders quickly increased bets on an October Fed rate increase. Daly said investors calmed after examining the data more closely.
Daly said the inflation data suggested that inflation risk remained elevated and had increased. However, Daly said risks are not realities and reacting to risk would be imprudent when the Fed has time to make a good decision. Daly said continued labor market stability gives the Fed room to focus on price stability. Daly argued for thoughtful deliberation rather than urgency and noted that more meetings lie ahead.
Financial market pricing now puts about a 40% chance on a second consecutive Fed rate increase at the next meeting. That probability is higher than before the inflation data, but market pricing no longer identifies an increase as the most likely outcome.