Fed’s Daly Highlights Bond Yield Surge Indicates Current Interest Rates Are Adequate

San Francisco Fed President Mary Daly notes the reduced necessity for additional rate hikes but stresses the importance of keeping policy options flexible.

Key Insights

• Mary Daly compares the recent increase in bond yields to an effective interest rate hike.
• The rise in bond yields signals tighter financial conditions, lessening the urgency for further Federal Reserve rate increases.
• Daly advocates for the Fed to maintain flexibility by avoiding firm commitments on future policy moves.
• Despite recent price declines, more progress is needed in addressing "supercore" inflation before considering rate cuts.

San Francisco Fed President Mary C. Daly stated on Thursday that the recent surge in Treasury yields demonstrates the Federal Reserve has raised interest rates sufficiently to combat inflation for now. However, she cautioned that the Fed should remain prepared to implement additional hikes if economic conditions warrant.

Highlighting a 36 basis point rise in bond yields since September, Daly explained that the tightening of financial conditions over the past three months has reduced the need to increase the benchmark interest rate beyond the current 5.25% to 5.5% range.

"This increase acts like a rate hike itself, so further tightening may not be necessary at this point," Daly remarked during a Q&A with Bloomberg's Lisa Abramowicz following her Economic Club of New York address.

Daly acknowledged recent price declines and a softening labor market as signs of progress in the Fed's inflation battle, though she emphasized that achieving the 2% inflation target remains a work in progress.

"We are approaching our inflation goal, but the final stretch is still ahead," she added.

Maintaining Flexibility and Monitoring Supercore Inflation

While suggesting the current Federal Funds rate should hold steady, Daly stressed the importance of the Fed retaining the agility to respond to changing economic conditions without pre-committing to a fixed policy path.

"Rather than following a predetermined policy trajectory, we must keep an open mind and preserve our options," she stated.

This includes the possibility of raising rates if inflation or growth momentum stalls. Daly pointed to "supercore" inflation—non-housing core services—as a persistent inflation segment requiring further improvement before the Fed can confidently ease monetary policy.

"Supercore inflation often lags other measures, so progress here is critical to confirm we are on track for price stability," she explained.

The Federal Open Market Committee is set to announce its next interest rate decision on November 1. Daly serves as a non-voting member this year under the committee's rotation system.

If you have news tips for Investopedia reporters, please email us at tips@investopedia.com.

Discover the latest news and current events in Government News as of 10-10-2023. The article titled " Fed’s Daly Highlights Bond Yield Surge Indicates Current Interest Rates Are Adequate " provides you with the most relevant and reliable information in the Government News field. Each news piece is thoroughly analyzed to deliver valuable insights to our readers.

The information in " Fed’s Daly Highlights Bond Yield Surge Indicates Current Interest Rates Are Adequate " helps you make better-informed decisions within the Government News category. Our news articles are continuously updated and adhere to journalistic standards.