San Francisco Federal Reserve Bank President Mary Daly on Saturday sounded a clear warning on the inflationary threat, and signalled that the US central bank may raise interest rates further, and keep them there longer, than has been expected.
Though inflation by the Fed’s preferred measure has fallen from its mid-2022 highs of around 7 per cent to 5.4 per cent in January, the latest monthly reading showed price pressures gaining at their fastest pace in seven months.
That’s despite what last year was the Fed’s most aggressive set of interest rate hikes in 40 years as it took its benchmark rate from near zero in March to what is now 4.5 per cent-4.75 per cent.
The acceleration of inflation in January “suggests that the disinflation momentum we need is far from certain,” Daly said in remarks prepared for delivery to the Princeton Economic Policy Symposium. “In order to put this episode of high inflation behind us, further policy tightening, maintained for a longer time, will likely be necessary.”
Coming from Daly, whose views are typically in line with Fed leadership, the remarks may add to expectations that Fed policymakers will lift rates higher in coming months than the 5.1 per cent that most of them had pencilled in December.
Fed policymakers will publish fresh projections for policy and the economy at the close of their upcoming March 21-22 meeting.
Some traders are even betting the Fed will deliver a half-point hike in March, rather than the quarter-of-a-percentage point rate hike seen as most likely – a reversion of sorts to the super-aggressive stance the US central bank pursued much of last year.