Mary Daly becomes latest Fed official to raise prospect of 0.25 point rate hike

Mary Daly has become the latest Federal Reserve official to raise the prospect that the US central bank will slow the pace of its interest rate hikes to a quarter-point hike next month, even as policymakers they argued that the benchmark rate exceeded 5%.

Daly, chairman of the San Francisco Fed, said on Monday that while it is “really too early to declare victory” on inflation, the central bank is considering raising the federal funds rate by 0.25 percentage point when the officials will meet later this month.

This would mark a step back from the half point hike the Fed implemented in December and a return to a more typical pace of central bank monetary tightening. The Fed pulled off a historic run of 0.75 percentage point rate hikes as it scrambled 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 hike for the next rate decision, Daly said the “case can be made for both.”

“It’s really about incoming information,” he said, adding that the Fed is “completely dependent on the data” as it assesses how much further to tighten monetary policy. Daly said he still believes the federal funds rate will need to go above 5% to reduce inflation, but how much above that level “is not entirely clear.”

Daly’s comments echo those of other regional presidents, including James Bullard of the St Louis Fed and Raphael Bostic of Atlanta. Both said the Fed still has a lot of work to do to dampen 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, chairman of the Richmond Fed, said last week that “it makes sense to drive more deliberately as we work to reduce inflation,” suggesting support for a more moderate rate hike.

According to individual projections released in December, most officials backed the fed funds peaking between 5% and 5.25%. It currently fluctuates between 4.25% and 4.50%. Minutes of the 2022 final meeting, released last week, also showed that no politicians supported rate cuts through 2024, a message recently reiterated by officials.

Traders in the federal funds futures markets expect the Fed to opt for a quarter-point rate hike in February and stop short of raising the policy rate above 5%. They are also betting that the Fed will reverse course and cut rates by the end of the year.

Speculation about a less hawkish Fed has become more pronounced as economic data improves, showing less intense inflationary pressures and a slowing labor market. The December consumer price index report will be released on Thursday.

Daly said she’s paying close attention to services inflation, which she says is the best proxy for underlying price pressures once food, energy and housing costs are taken out.

Those costs, which are directly tied to the labor market, have shown “no sense” of slowing down, he said.

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