San Francisco Federal Reserve President Mary Daly said the central bank will probably need to raise interest rates again to bring inflation under control, but she sees no urgency to do so at the Fed's upcoming October 27-28 meeting. Her comments, made in an interview with Reuters, come just days after new data showed consumer prices rose 3.7% over the 12 months through September.
Daly described inflation as still "too high" and said it's "more likely than not" that policymakers will need "additional adjustments" after holding rates steady for now. She pointed to gasoline as a key driver of the latest inflation reading, while noting that "underlying" inflation—the stickier parts of prices like rent and services—remained uncomfortably firm.
What's behind the Fed's cautious stance?
The Fed has been on a rapid rate-hiking campaign over the past year and a half, lifting its benchmark rate to a range of 5.25% to 5.5%—the highest level in over two decades. The goal has been to cool the economy and bring inflation down to the central bank's 2% target. While inflation has fallen from its peak of around 9% in mid-2022, it remains well above that target.
Daly's comments suggest the Fed is in a "wait-and-see" mode. Many policymakers believe they have done enough for now, but they want to see more evidence that inflation is sustainably heading lower before declaring victory. The October meeting is widely expected to result in no change to rates, but the door remains open for a hike later this year or early next year if inflation proves stubborn.
The September inflation report, which showed prices up 3.7% year over year, was hotter than many economists had hoped. Core inflation, which excludes food and energy, rose 3.2% over the same period, also above the Fed's comfort zone. That has led some investors to boost their bets on another rate hike before the end of the year.
What does this mean for investors?
For everyday investors, the key takeaway is that interest rates are likely to stay higher for longer. That has broad implications for portfolios. Higher rates tend to weigh on stocks, especially growth-oriented sectors like technology, because they increase the cost of borrowing and make future earnings less valuable. Indeed, tech ETFs and chip stocks took a hit after the latest inflation data.
Bonds, on the other hand, become more attractive as yields rise. The yield on the 10-year Treasury has climbed to multi-year highs, offering investors a rare opportunity to earn meaningful income from fixed-income investments. However, rising yields also mean existing bond prices fall, which can hurt bond fund holders.
Commodities like gold have also felt the pressure. The dollar strengthened and gold fell to a two-month low after the inflation report, as traders bet on more Fed tightening. A stronger dollar can also weigh on multinational companies' earnings and emerging market assets.
For those with cash in savings accounts or money market funds, higher rates are a positive—yields on these products have risen to levels not seen in years. But for borrowers, especially those with variable-rate debt like credit cards or home equity lines, the cost of borrowing continues to climb.
What to watch next
Investors will be closely watching the Fed's October meeting for any signals about future moves. Daly's comments suggest the committee is comfortable holding steady for now, but the data will ultimately dictate the path. Key indicators to watch include monthly jobs reports, wage growth, and especially the next inflation readings.
Daly also noted that the economy is showing signs of a "patchwork" recovery, with some sectors cooling while others remain resilient. That unevenness makes the Fed's job trickier, as it tries to balance the risk of doing too much (triggering a recession) against doing too little (allowing inflation to become entrenched).
The Fed's Beige Book, a collection of anecdotal economic reports from around the country, recently painted a similar picture of an economy that is slowing but not collapsing, with inflation pressures still present.
For now, the message from Daly and other Fed officials is clear: they are not done fighting inflation, but they are in no rush to act. That means investors should brace for a period of elevated rates, which could continue to influence market movements in the weeks ahead.
