San Francisco Federal Reserve President Mary Daly on Friday became the latest central bank VIP to signal she would support another big increase in interest rates in July in an effort to slow runaway U.S inflation. But she also said the central bank wants to avoid crippling the economy in the process.
At a conference in California, Daly indicated a second straight 3/4-point increase in the Fed’s benchmark short-term interest rate might be needed to help get inflation under control more quickly.
The cost of living has jumped 8.6% in the past year to mark the biggest increase in inflation in 40 years.
“Last week, the [Fed] increased the funds rate by 75 basis points and signaled that further rate hikes of a similar magnitude are likely,” Daly said at an event sponsored by the Shadow Open Market Committee, a group that tends to push the Fed to be more vigilant against inflation.
Daly said it’s important to lift the Fed’s benchmark rate to 3% as soon as possible. Higher rates tend to slow the economy — and inflation — by raising the cost of borrowing for credit cards, mortgages, new cars and other consumer and business loans.
The central bank had kept its benchmark rate near zero during most of the pandemic to stimulate the economy, but it began to raise it in March. Last week the Fed lifted its rate by 3/4 point to a range of 1.5% to 1.75%.
Daly suggested she would like to reassess the economy once its benchmark fed funds rate got to 3%, a bit below what most other senior Fed officials have plotted. The central bank forecast the rate would end the year at 3.4% — and some see it going even higher — before topping out at 3.8% in 2023.
Daly said the Fed must be careful to avoid damaging the economy.
“Bringing inflation down is the Federal Reserve’s number one priority right now. And we have the tools and the will to do it,” Daly said. “But we actually want to do more than that. We want to bring inflation down without crippling growth and stalling the labor market.”
Just a few months ago, Daly believed the Fed would only need to raise its short-term interest rate to 2.5%. She and other Fed officials became more alarmed, however, after another big increase in inflation last month.
The Fed then proceeded to approve the largest increase in U.S. interest rates in 28 years.
Daly is not a voting member this year of the Fed’s interest-rate setting committee.