Fed's Daly says a rate hike is likely needed as inflation worsens

what happened

Reuters reports that San Francisco Fed President Mary Daly said on Friday she leans toward raising the central bank's policy rate. She pointed to services prices moving the wrong way and signs that inflation is proving persistent, saying a hike is most likely needed in coming months.

Daly said businesses increasingly report they have little room left to absorb higher costs within their margins and want to pass them on to shoppers, which is the inflationary pressure she wants to avoid. Citing Reuters, she noted core consumer prices have risen roughly 0.3% month over month for three straight months, well above the pace consistent with the Fed's 2% target. She singled out services excluding housing as especially troubling because that category tends to be sticky.

Consumer spending, which accounts for most of the US economy, has so far held up, and Daly plans to watch the holiday season closely to see whether households pull back. Markets are pricing in quarter-point hikes at the December 8-9 and January 26-27 meetings, following a September increase and an October pause.

why it matters

The hawkish remarks from a regional Fed president add to bets on a rate increase at the December and January meetings. Expectations of tighter policy typically support the dollar and weigh on bonds and rate-sensitive stocks. Upcoming retail sales and consumer spending data could shape how the market reads the Fed's next move.

market impact

USD and short-term US Treasuries: firmer Fed rate expectations lift the dollar and pressure bond prices

• ▲US dollar pressure up — higher expectations of Fed rate hikes make dollar-denominated assets more attractive
• ▼US Treasuries pressure down — higher expected policy rates push yields up and bond prices down

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