EXCLUSIVE-Fed's Daly says rate hikes likely needed, but not urgently

The Federal Reserve will probably need to increase short-term interest rates further to rein in too-high inflation, San Francisco Federal Reserve President Mary Daly said on Wednesday, but ‌she signaled there is no need to do so at the US central bank's October 27-28 meeting. "We are more likely than not to need additional adjustments, but the timing of those adjustments to me is something we’re still deliberating," Daly told Reuters in an exclusive interview. "I don’t feel urgent that we have to decide with ‌a limited set of information. I think we have the time that we need."

Several of Daly's colleagues have also signaled in recent weeks that the Fed ‌is unlikely to raise rates this month. The Fed's policy rate is in the 3.75%-4.00% range. Longer-term borrowing costs are even higher, with some — like 7.5% mortgage rates — putting a damper on demand in some parts of the economy. Daly said she feels financial markets understand the Fed's "reaction function," pointing to how traders responded to data earlier on Wednesday that showed consumer price inflation accelerated ⁠to 3.7% ​in the 12 months through September, ⁠a bit faster than economists had anticipated. The Fed targets 2% inflation by a different, but related, measure.

Though the initial reaction was "robust," she said — rate futures traders quickly piled into bets on an ⁠October Fed rate hike — investors "calmed" after parsing the data. Higher gasoline prices drove the overall increase, and underlying inflation, while still sticky, did not take a sharp turn upward. "Definitely this ​data point suggests that the risk to inflation remains elevated," Daly said. "The risk to inflation has gone up more, but risks are not realities, ⁠and reacting on risk when you have time to make a good decision, to me, feels imprudent."

Daly said the labor market's continued stability gives the Fed room to focus on price stability. But, she ⁠said, "Why ​force urgency when you don’t need to have urgency? Why not take the time to be thoughtful and deliberate? And we have more meetings ahead of us."

Financial market pricing now puts about a 40% chance of a second straight Fed rate hike at the central bank's next meeting, higher than before ⁠the data but no longer pointing to an increase as the most likely outcome, as was the case shortly after the inflation report was released. The markets, ⁠she said, "understand that we're committed to price ⁠stability, and we will do what it takes to achieve it."

Policymakers "have a responsibility to communicate effectively to the public and be accountable, transparent and clear," she said. "The responsibility is to be crystal clear with people about what your objectives are, ‌what you’re accountable for and ‌how you’re going to balance the risks."