San Francisco Fed’s Daly Signals Possible Interest Rate Hikes to Combat Inflation

Mary Daly, president of the Federal Reserve Bank of San Francisco, indicated on Friday that the central bank will likely need to continue raising interest rates to address ongoing inflation pressures. Speaking during a live interview with CNBC's Steve Liesman, Daly emphasized that while further tightening of monetary policy appears necessary, the exact timing and scale remain uncertain as officials assess incoming economic data.

"My expectation is we're going to have to tighten policy further," Daly stated. "Exactly when and how much is still to be decided because we just have to take all the variables that are coming in. More is likely to be needed, and certainly ... I'm prepared to do that if that's what the economy calls for." Her comments came alongside the release of the latest government employment figures, which showed the U.S. economy added 165,000 jobs in October and the unemployment rate fell slightly to 4.1 percent.

The October job gains far exceeded Wall Street forecasts, nearly tripling the consensus estimate compiled by Dow Jones. Daly described these numbers as positive for American workers but also highlighted the ongoing challenges posed by inflation on household budgets. Average hourly earnings grew 3.1 percent year over year in October, yet inflation as measured by the Consumer Price Index stood at 3.7 percent in September, effectively eroding wage gains.

"They see that they can get jobs, they continue to spend. They're not out of the game, but they are on a treadmill of high inflation," Daly explained. "This has been high for too long, almost six years, and we're really starting to feel the burden of that spread everywhere." She pointed out that while economic growth remains generally steady, the persistence of inflation is a key concern for policymakers.

According to Daly, the labor market is solid but not overheated, with real wages declining because wage growth is not keeping pace with rising prices. "The crux of this is good news on the jobs front, but it is not so clear that Americans are going to gain ground in the labor market," she said.

In September, the Federal Open Market Committee (FOMC) increased the benchmark federal funds rate by 25 basis points to a target range of 3.75 to 4 percent. However, at its most recent meeting, the committee opted to hold rates steady, choosing to await additional data before making further moves. Daly, who will have a voting role on the FOMC next year, expressed support for a cautious, gradual approach to future rate adjustments.

Her stance aligns with other Federal Reserve officials such as Richmond Fed President Thomas Barkin, who also anticipates higher rates but remains uncertain about the timing. Daly reflected on the decision to raise rates in September and then pause last month, calling it appropriate given the current global uncertainties.

"I was really supportive and completely thought that that was the right move to move in September," Daly noted. "I also think that it was good to be on hold at the last meeting because the world is filled with uncertainty." This prudent approach underlines the Fed’s effort to balance controlling inflation without unnecessarily hindering economic growth.

The Federal Reserve’s recent actions and statements come amid a broader economic environment where inflation, though moderating from its peak, remains above the central bank’s 2 percent target. The labor market continues to show strength, with steady job creation and low unemployment, but the gap between wage growth and inflation is creating challenges for many households.

As the Fed navigates this complex landscape, policymakers like Daly are carefully weighing the risks of moving too aggressively against the potential costs of allowing inflation to remain elevated. Their decisions will have significant implications for borrowing costs, consumer spending, and overall economic momentum in the months ahead.