US Federal Reserve's Mary Daly sees more rate hikes ahead, but not necessarily in October

San Francisco: 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 also signaled there's 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 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."

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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, and longer-term borrowing costs are even higher, with some -- like 7.5% mortgage rates -- putting an increasingly obvious 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 through 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."

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Daly said that 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, up from before the data but no longer seeing an increase as the most likely outcome.