Mary Daly became the latest Federal Reserve official to raise the prospect of the US central bank slowing the pace of its interest rate increases to a quarter-point rise next month, even as policymakers backed the benchmark rate surpassing 5 per cent.
Daly, president of the San Francisco Fed, on Monday said that while it is “really too soon to declare victory” on inflation, the central bank is considering raising the federal funds rate 0.25 percentage points when officials next gather later this month.
That would mark a step down from the half-point increase the Fed implemented in December and a reversion to a more typical pace of monetary tightening for the central bank. The Fed delivered a historic string of 0.75 percentage point rate rises as it raced to tame price pressures after underestimating the inflation problem last year.
When asked in an interview with the Wall Street Journal on Monday whether she supported a quarter-point or half-point rate rise for the next rate decision, Daly said the “case can be made for either one”.
“It really is about incoming information,” she said, adding the Fed is “completely data-dependent” as it assesses how much further to tighten monetary policy. Daly said she still thinks the fed funds rate will need to surpass 5 per cent in order to get inflation down but how far above that level is “not completely clear”.
Daly’s comments echo those of other regional presidents, including James Bullard of the St Louis Fed and Atlanta’s Raphael Bostic. Both have said the Fed still has more work to do to damp demand and that the data would determine whether the central bank could move at a more measured pace as it approaches its so-called terminal rate.
Thomas Barkin, president of the Richmond Fed, said last week that it “makes sense to steer more deliberately as we work to bring inflation down”, suggesting support for a smaller rate rise.
According to individual projections published in December, most officials back fed funds peaking at between 5 per cent and 5.25 per cent. It currently hovers between 4.25 per cent and 4.50 per cent. Minutes from the final gathering of 2022, released last week, also showed that no policymaker backed rate cuts until 2024, a message officials recently reiterated.
Traders in federal funds futures markets expect the Fed to opt for a quarter-point rate rise in February and stop short of raising the policy rate above 5 per cent. They also bet the Fed will reverse course and cut rates by the end of year.
Speculation about a less aggressive Fed has become more pronounced as the economic data have improved, showing less intense inflationary pressures and a slowing labour market. December’s consumer price index report will be released on Thursday.
Daly said she is paying closest attention to services inflation, which she said is the best proxy for underlying price pressures, once food, energy and housing costs are stripped out.
Those costs, which are directly tied to the labour market, have shown “no sense” of slowing, she said.