Expect interest rate hikes to continue into 2023, Fed official says

By Nicole Goodkind, CNN Business

San Francisco Federal Reserve president Mary Daly said Thursday morning that raising interest rates by either half or three quarters of a percentage point in September would be a “reasonable” way to bring inflation down.

The hikes would follow back-to-back 75-basis point increases by the Federal Reserve, intended to tackle white hot inflation, which remains near a 40-year high.

Last month’s Consumer Price Index, a key inflation measure, showed that rising prices took a bit of a breather with consumer prices increasing by 8.5% year over year, a slower pace than the 9.1% increase in June. “There’s some relief, and I was really pleased to see that, but I don’t count on it,” Daly told CNN’s Julia Chatterley. “We have a lot of work to do at the Fed to bring us back to price stability.”

Daly doesn’t see the Fed easing interest rate hikes anytime soon. She predicts they’ll continue into at least 2023, but says that’s ultimately a good thing — even if Wall Street investors don’t agree. “There is a lack of understanding in the markets, but consumers seem to understand,” she said. “They depend on the Fed to not introduce unnecessary volatility. The worst thing you can have as a business or a consumer is to have rates go rapidly up and then come down. … It just causes a lot of caution and uncertainty.”

A raise and hold strategy has historically paid off for the Fed, she said. The central bank is actively trying to warn against the idea of a “large hump shaped rate path, where we’ll ratchet up really rapidly this year and then cut aggressively next year.”

Still, the Federal Reserve must walk a tightrope between triggering a recession and raising interest rates, and fears of a severe economic downturn have been growing in recent months. Daly doesn’t see that happening. “When we look at the data instead of the, you know, the worst case scenarios, I feel really relieved,” she said. Instead of giving into fears that could lead to a self-fulfilling prophecy, Daly urged Americans to examine the current facts.

“The job market is strong, inflation is too high,” Daly said, “and the Federal Reserve is committed to using its tools to bring the economy back to a sustainable path where people don’t have to wake up every morning worrying about whether their real wages are eroding.”

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