Fed’s Daly signals bias toward more rate hikes

San Francisco Federal Reserve President Mary Daly said her bias is that the central bank will likely need to raise its policy rate further as inflation shows signs of persistence. She emphasized that she will deliberate potential increases with colleagues at the December policy meeting and future meetings, with decisions based on how the economy evolves. Daly framed additional tightening as necessary because underlying price pressures remain too strong relative to the Fed’s goal of 2% inflation.

Daly stressed that her expectation of more rate hikes reflects ongoing inflation pressures across the economy, not just in sectors directly affected by tariffs or oil. She described her stance as a bias toward additional tightening, while leaving open the exact size and timing of any moves.

Daly highlighted recent inflation readings as a key factor in her assessment. The core consumer price index, which excludes volatile food and energy prices, has risen about 0.3% month over month in each of the last three months. She noted this pace is higher than the 0.2% or less that would be consistent with achieving the Fed’s 2% inflation target on a year-over-year basis.

Economists estimate that core personal consumption expenditures inflation, a key Fed gauge, rose around 3.3% in October from a year earlier. Daly said she is particularly concerned that services inflation excluding housing is not moving in the correct direction, describing that component as especially troubling because it tends to be sticky. She said businesses increasingly report they are running out of room to absorb higher costs in margins and are considering passing price increases on to consumers.

Daly said the Fed will likely need to raise interest rates further to deal with elevated inflation but did not argue for rushing the process. She observed that rising bond yields and tighter financial conditions are helping to restrain the economy and inflation. In her view, these developments give policymakers more time to make calibrated decisions on how much additional tightening is appropriate and when to implement it.

Daly said financial markets generally understand that the Fed sets interest rates in response to evolving economic conditions. She reiterated that her bias is toward additional tightening but said the exact magnitude and timing will depend on incoming data over many quarters.

As the December policy meeting approaches, Daly said she is closely monitoring consumer spending, which accounts for most of the U.S. economy. She described consumer spending as surprisingly resilient so far, with little evidence of a broad pullback. However, she said she is watching the next one to three months, especially the holiday season, to see whether consumers reduce spending as prices rise or continue to spend at current levels.

Daly said consumers may be "running out of gas" in Las Vegas and other states.