Fed’s Daly: Still too soon to say rate hike cycle is over -CNBC

By Michael S. Derby

NEW YORK (Reuters) – Federal Reserve Bank of San Francisco President Mary Daly said on Friday she is not ready to say yet whether the central bank is done raising its interest rate target to get inflation back to 2%.

The Fed’s monetary policy “is in a very good place” and “the news on inflation has been fairly good,” Daly said in a CNBC interview. “We shouldn’t dismiss that,” she said, while adding “all of that said, it is far too early to declare victory” and declare the Fed need not raise rates again.

Daly’s comments to the television channel were her first since last week’s Federal Open Market Committee gathering. At the meeting officials maintained their short-term rate target for a second time at between 5.25% and 5.5%, while preserving the option to boost the cost of borrowing again if price pressures do not continue falling to the 2% inflation target.

Part of the reason why the Fed reckoned it could hold steady was a jump in bond yields that helped increase the drag on the economy. Financial market participants broadly believe the Fed is done hiking its short-term target and will begin to cut it some time next year, but Fed officials have pushed back against that view.

In an appearance Thursday, Fed Chair Jerome Powell said it wasn’t clear if the Fed had boosted rates to the right level to slow the economy, adding “if it becomes appropriate to tighten policy further, we will not hesitate to do so.”

In her television appearance, Daly echoed Powell’s comments. “You can be significantly restrictive, which I think we are, and you can still not be sure if you’re sufficiently restrictive” in the way one needs to be to bring price pressures back down, Daly said.

For now the Fed needs to watch the data and stand ready to act, she said.

“There’s a lot of demand for certainty that we would say we’re done or we’re definitely hiking, but the truth is, we don’t know,” Daly said.

Thoughtful monetary policy “means we stand in the ready position, ready to stop if the inflation data continue to perform well, and ready to raise again to get to sufficiently restrictive if we mean to pull the reins back on the economy even more,” she said.

Daly also said a tightening in financial conditions seen since the Fed’s September policy meeting is still weighing on the economy even with recent declines in Treasury bond yields, and she said it was having the desired and expected impact on the economy. If financial conditions continued to ease, Daly said that would merit Fed attention.

What’s more, Daly noted that recent churning in the bond market was unlikely to be driven by some sort of underlying problem.

“Bond yields move around for a variety of reasons, and there’s a lot of uncertainty out there,” Daly said. “I don’t think we should be surprised at that volatility: I would like to make a very big distinction between volatility that causes financial dislocation or something worrisome about market functioning – we’re not there – and volatility that’s a natural outcome of tremendous uncertainty,” she said.