Daly says Fed can wait on more hikes despite likely need for increases

Her comments are the most explicit objection yet to the surge in October-hike pricing that came after the CPI data. The remarks should shave some probability off a move at the October 27-28 gathering without disturbing market expectations for a December increase. That combination would relieve some of the pressure on the short end of the Treasury curve while yields at the long end stay tied to a higher-for-longer outlook. Since Daly directly tied headline inflation to gasoline prices, oil now stands as the decisive variable. A renewed climb in crude connected to the Iran war would put her argument that the Fed can afford to be patient to the test. Her tone is also a departure from Goolsbee's more uneasy one, a sign that officials are united on the destination but split on the schedule.

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Daly's view is that the Fed probably has more rate increases still to deliver, yet she sees no reason to hurry one through in October.

Key points:

• San Francisco Fed President Mary Daly told Reuters that further rate rises are more likely than not to be required.
• She said the timing has yet to be settled and indicated there is no need to act at the October 27-28 gathering.
• Daly said she feels no urgency and would rather take time for a careful decision than respond to a thin amount of information.
• Gasoline prices are behind the headline inflation reading, she said, while core inflation remains firm, just as she expected.
• The risk of inflation settling above target is still high, but a solid labour market means the Fed can concentrate on price stability, Daly said.
• She was reassured that markets settled down after their initial sharp response to the CPI report.

The Federal Reserve will probably still have to lift interest rates further to get inflation down, San Francisco Fed President Mary Daly said on Wednesday, but she made clear that no action is required at the October 27-28 session. The remarks were made in an exclusive interview with Reuters.

Further adjustments were still the more probable outcome, Daly said, even as she continued to weigh when they might come. She said she did not feel pressed to make a call based on a limited set of data and that the Fed had the time necessary to decide. To move when there is room to reach a well-considered decision would be imprudent, in her view, and policymakers would do better to act thoughtfully and deliberately.

Her remarks landed on the day September consumer price data showed inflation at 3.7% from a year earlier, above expectations and far above the Fed's 2% objective. Daly said the numbers indicated that gasoline prices were pushing up the headline figure, while core inflation, excluding volatile food and energy, remained sticky as she had anticipated. It was not yet apparent, she added, whether inflation would ease as recent shocks dissipate or become worse if those shocks last.

Daly said risks that inflation will persist above target are still elevated. With the labour market holding steady, she added, the Fed is able to focus on price stability. She also said she was reassured to see markets calm after their initial strong response to the CPI report, an indication that investors understood how the Fed would react.

The comments help clarify the positions of policymakers with this month's meeting approaching. Earlier on Wednesday, Chicago Fed President Austan Goolsbee described the CPI data as discouraging, citing persistent services inflation. The Fed's Beige Book survey flagged that price pressures were building in various districts, with diesel costs playing a growing role. The CPI release had boosted market expectations for an October hike, while Daly's comments suggest she prefers to wait.

The Fed lifted its target range by a quarter point in September, bringing it to 3.75%-4%, and indicated one more increase will come this year. Most officials have treated December as a likelier moment than October, and Daly's comments match that view.