San Francisco Federal Reserve President Mary Daly said the central bank may still need to raise interest rates further to bring inflation under control, but she signaled she is in no rush to do so. Speaking at an event hosted by Stanford's Institute for Economic Policy Research, Daly said her "bias is that further tightening will be needed," pointing to persistent price pressures in services.
Her comments come as investors closely watch the Fed's next moves, especially after this week's inflation report showed consumer prices remain stubbornly high. The Bureau of Labor Statistics reported that core consumer prices—which exclude volatile food and energy costs—rose 0.3% in October, marking the third straight month of that pace. That keeps the Fed's fight against inflation "uncomfortably alive," as Daly put it.
Why services inflation matters
Services inflation is a key concern for policymakers because it tends to be stickier than goods prices. Once services prices start rising, they can stay elevated for a long time, making it harder to bring overall inflation back to the Fed's 2% target. This includes things like rent, healthcare, and dining out—categories that are less sensitive to interest rate changes and more tied to wages and consumer demand.
Daly's remarks suggest that the Fed is not ready to declare victory over inflation, even as the economy shows some signs of cooling. The central bank has already raised its benchmark interest rate to a range of 5.25% to 5.50%, the highest in over two decades, and has held it there since July. But with inflation still running above target, some officials believe more tightening may be necessary.
Bond yields give the Fed breathing room
One factor that could slow the Fed's hand is the recent rise in longer-term Treasury yields. Daly welcomed this development, saying it "gives us a little more time" because it tightens financial conditions on its own. In plain English: when bond yields climb, borrowing becomes more expensive for households and businesses, which can cool demand and help fight inflation without the Fed having to raise rates again.
This dynamic is already playing out in the housing market. Mortgage rates have climbed in tandem with Treasury yields, making home purchases more costly. Even if the Fed holds rates steady, the bond market can effectively do some of the central bank's work for it.
The trade-off is timing. Higher yields can reduce the need for aggressive Fed action later, but they also put immediate pressure on borrowers. For households, that means mortgage rates, auto loans, and some business borrowing can stay elevated even during a "pause" in Fed hikes.
What it means for investors
For everyday investors, Daly's comments reinforce a few key points. First, the Fed is still focused on fighting inflation, and it may not be done raising rates. That means market expectations for rate cuts in the near term could be premature. Hot inflation data has already revived bets on further hikes, and Daly's remarks add to that narrative.
Second, the bond market is playing a bigger role in monetary policy. When yields rise, they tighten financial conditions across the economy, which can affect everything from stock valuations to corporate borrowing costs. Investors should watch Treasury yields as a signal of how much pressure the economy is feeling.
Finally, the path of inflation remains uncertain. Services inflation is proving sticky, and the latest CPI report shows that progress is slow. Traders are closely watching the Fed for clues about the next move, and any surprise in the data could shift market expectations quickly.
Daly's stance is a reminder that the Fed is data-dependent. She said she wants to see more evidence that inflation is on a sustainable downward path before feeling confident about pausing. That means upcoming inflation reports and jobs data will be crucial in determining whether the Fed raises rates again or holds steady.
For now, the message is clear: the Fed is not rushing, but it is also not done. Investors should brace for the possibility of further rate hikes, even as bond yields do some of the heavy lifting.
