Fed’s Daly: More to do on inflation; 2023 rate cuts not her ‘modal’ outlook

The Federal Reserve’s work of bringing down inflation is “nowhere near” done, San Francisco Fed President Mary Daly said on Tuesday, adding U.S. central bank officials are “still resolute and completely united” in the task of achieving price stability.

Daly, in an interview streamed on LinkedIn and hosted by a CNBC anchor, said, “We have made a good start, and I feel really pleased with where we’ve gotten to by this point,” but she warned there is still “a long way to go” to bring inflation down from four-decade highs.

The Fed last month raised its benchmark interest rate – its key policy tool – by three-quarters of a percentage point for a second straight meeting. Fed Chair Jerome Powell after that meeting said another “unusually large” rate hike may be appropriate again in September if inflation is not easing to a sufficient degree.

Inflation as measured by the Consumer Price Index ran at 9.1% year-on-year in June and prices that month were 6.8% higher from a year earlier under the Fed’s preferred inflation gauge, the Personal Consumption Expenditures Price Index. Both are the highest in four decades.

“The number of people who can’t afford this week what they paid for with ease six month ago just means our work is far from done,” Daly said.

Daly, who is not a voter on the policy-setting Federal Open Market Committee this year, also pushed back against market expectations that the Fed will turn to rate cuts next year in the face of a weakening economy.

“That would not be my modal outlook,” she said. “My modal outlook, or the outlook I think is most likely, is really that we raise interest rates and then we hold them there for a while at whatever level we think is appropriate.”

The remarks from Daly reverberated in rate futures markets where they were seen as having an unusually hawkish tilt from a policymaker viewed by most as a member of the Fed’s dovish-leaning wing. Expectations the Fed would reverse course and start cutting rates in the first half of 2023 diminished significantly as reflected in fed fund futures pricing, while the probability of another 75 basis point increase next month moved notably higher.

“We need to keep committed until we actually see it in the data” that inflation is materially coming down, Daly said.