Fed President Mary Daly Gives Boost To The Markets, (Sort Of) Substantiates Interest Rate Criticism

Federal Reserve Bank of San Francisco President Mary Daly gave a welcomed boost to the markets Friday, substantiating recent criticism that the Fed is raising rates too quickly by saying while more tightening is needed, the Fed can easily find itself overtightening.

While Daly said slowing rate hikes should be not considered at this point, she said it will be considered in the future. 

What Happened: In light of the ongoing price hikes that are pushing inflation to levels not seen in over 40 years, policymakers are anticipated to announce the fourth straight 75-basis point rate increase at its Nov. 1-2 meeting.

There are also expectations for a 75-basis-point increase at the December Fed meeting, which would raise the Fed funds rate to roughly 4.5% by year's end.

Read also: Will Gold Survive Another Jumbo Rate Hike?

Speaking during a fireside chat at the University of California Berkeley, Daly, who doesn’t vote on monetary policy this year, said the 4.5% to 5% range is likely where the Fed would hold rates — indicating that there may be no rate increases at the beginning of next year.

Why It Matters: Policymakers should listen for symptoms of a recession when talking to contacts in their districts, according to Daly. If they don't, a "step-down" policy may be enacted, which would mean that future rate increases would be incrementally less — think 50- or 25-basis point rate hikes.

The Fed president acknowledged the need for tighter policy, but said the high CPI number for September "wasn't that surprising" and pointed out that it is a lagging indicator.

The benchmark fed funds rate was expected to peak at 4.6% next year by the central bank's 19 policymakers on average in September. The CPI that followed dampened sentiment as some officials argued that in order to reduce demand and stabilize prices, a higher fed funds peak in the median term could be required.

The Fed will likely adopt a restrictive monetary policy until 2025, as the fed funds rate median target is 2.9% in that year.

Price Action: The benchmark S&P 500 gained 63 points to 3,728 Friday, the Dow climed 580 points to 30,913, and the Nasdaq added 158 points to 10,773.

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