Fed’s Daly Sees Half-Point September Hike; No Inflation Victory

(Bloomberg) -- The cooler inflation reading for July is welcome news and may mean it’s appropriate for the Federal Reserve to slow its interest-rate increase to 50 basis points at its September meeting, but the fight against fast price growth is far from over, San Francisco Fed President Mary Daly said.

The July figures are “significant in that they are saying that we’re seeing some improvement but they’re not victory,” Daly said Thursday in an interview with Kathleen Hays on Bloomberg Television. “It really behooves us to stay data dependent and not call it.”

Daly reiterated that her base case is for a half-percentage point hike at the Fed’s meeting next month, following two back-to-back 75-basis-point hikes in June and July, but said she has an “open mind” about another large increase being necessary. 

Increases in consumer prices slowed to an 8.5% year-over-year pace last month, a report showed Wednesday, from 9.1% in June, which was a four-decade high. A separate report Thursday showed that producer prices fell in July from the month prior, the first drop in more than than two years. 

While that’s welcome news for policy makers, “inflation is too high, but it is always important to start seeing it come down a little bit,” Daly said. 

Officials will see another month of inflation data and the August jobs report before their Sept. 20-21 meeting.

The Fed raised rates by three quarters of a percentage point in July to a range of 2.25% to 2.5%, following a similar-sized hike at the June meeting and smaller increases earlier this year. In all, policy makers see the fed funds rate reaching 3.4% this year, according to the median estimate of their June projections.

That year-end estimate is “about right,” Daly said. That’ll bring the fed funds rate above her estimate of neutral -- at about 3% -- and into restrictive territory. The Fed will then likely continue to raise interest rates into 2023, which was also indicated in the June projections. 

Financial markets, which have rallied in the past month, may not be correctly interpreting the Fed’s rate-hike path, Daly said. 

Holding Rates

“The other important feature that markets didn’t come in with is that I don’t see this hump-shaped part where we raise interest rates to really high rates and then bring them down,” Daly said. “I think of raising them to a level that we know is going to be appropriate and then holding them there for a while so that we continue to bring inflation down until we’re well and truly done.”

The San Francisco Fed chief said she wants to see financial conditions tighten further and that synchronized central bank action around the globe will slow economic growth. 

Other policy makers have come out in favor of larger rate increases, including St. Louis Fed President James Bullard and Governor Michelle Bowman. Daly is not a voter on this year’s policy-setting Federal Open Market Committee.

Daly said high inflation robs people of their dignity. She’s seen people at grocery stores pick up products and then put them back because they can’t afford everything they need and parents telling children that they can’t have certain things.

“That indignity of inflation is what’s really cruel about inflation -- it hurts people who have less, it hurts them more,” Daly said. “And it has that sense that you’re trying as hard as you can and you still can’t make it.”

(Updates with comment from Daly in fifth paragraph.)

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