US inflation

Mary Daly of the Federal Reserve Bank of San Francisco forecast that decision-makers will probably need to raise interest rates even higher and hold them there for a longer period of time.

Although though inflation on the Fed's preferred inflation index fell from a mid-2022 high of almost 7% to 5.4% in January, the most recent monthly numbers show that price pressures are rising at the fastest rate in seven months.

This is true even though the Fed dropped the benchmark rate from almost zero to the current 4.5% to 4.75% in March last year, marking its most aggressive set of interest rate rises in 40 years.

Daly claims that, given the increase in prices in January, the momentum we need to reduce inflation is far from certain. In a planned speech at the Princeton Economic Policy Symposium, Daly made this assertion.

Daly's remarks, whose views are generally aligned with those of Fed management, could reinforce expectations that Fed policymakers will raise rates in the coming months higher than the 5.1 per cent most of them had outlined in December.

Inflation, which reached a 40-year high last year, fell in the last three months of 2022 but rose again in January. Data for that month also showed strong consumer demand and mass hiring by companies.

Several of her peers have since said that interest rates may have to rise higher than they previously thought, and investors are now betting on a peak around 5.45%. That level could be achieved by raising rates by 25 basis points at each of the next three meetings.

However, Daly did not specify in her speech on Saturday or in conversation with reporters afterwards how much further tightening she thought was appropriate, but told reporters that she was more focused on the level the rate should reach than on the pace.

She also mentioned the possibility of further price pressure as businesses pass through to customers the price of converting to low-carbon energy in the battle against climate change.

And she said that she was particularly concerned about the still-unproven prospect that Americans may develop inflationary mentality, making the Fed's fight against inflation even more difficult.