Tougher policies, longer term likely to be needed

(Reuters) – San Francisco Federal Reserve Bank Governor Mary Daly issued a clear warning on Saturday about the threat of inflation, suggesting the central bank could raise interest rates further than expected and hold it for longer. bottom.

Inflation, the Federal Reserve’s preferred indicator, fell from a high of about 7% in mid-2022 to 5.4% in January, but the latest monthly reading showed the fastest pace in seven months. indicates that price pressures are increasing.

Last year saw the Fed raise its benchmark rate from near zero in March to 4.5% to 4.75% today, despite the Fed’s most aggressive rate hikes in 40 years.

In a speech prepared for the Princeton Economic Policy Symposium, Governor Daly said the acceleration in inflation in January “suggests that the disinflationary momentum we need is not certain.” “Further tightening will be needed for a long period of time to end the episode of high inflation.”

Daley’s views are generally in line with Fed leadership, and his remarks could raise expectations that Fed policymakers will raise interest rates in the coming months beyond the 5.1% most expected in December. There is a nature.

Fed policymakers will release new policy and economic forecasts at the close of the March 21-22 meeting.

Some traders are betting that the Fed will hike rates by 0.5 percentage points in March, rather than the 1/4 percentage point hike seen most likely. Most of last year.

Daly didn’t use a prepared statement to give his view on what the March rate hike should be or exactly how much it needs to be done.

Still, she paints a challenging picture for the Fed, not only for the current stubbornly high inflation, but also for a range of new pressures that could lead to high inflation for some time to come, including corporate efforts to bring factory production back to the United States. I was. Ongoing labor shortages abroad and at home.

She also noted the potential for further price pressure as companies pass on the costs of moving to low-carbon energy sources in the fight against climate change to consumers.

And she focuses specifically on the potential for inflation psychology to take root in American minds and make the Fed’s inflation struggle even more difficult.

“Achieving mandated goals requires time and a broader perspective,” she said. “As policymakers, we must respond to an evolving economy in real time and prepare for what the economy will look like in the future.”