By San Francisco Federal Reserve President Mary Daly said Wednesday that the central bank’s benchmark interest rate may have to rise above 5% to start to put downward pressure on inflation.
Getting the Fed’s benchmark rate somewhere between 4.75% and 5.25% is “a reasonable place to think about,” Daly said, in an interview on CNBC.
Earlier this month, the Fed raised its benchmark rate by a jumbo 0.75 percentage points to a range of 3.75%-4%.
Daly said she has penciled in a 5% terminal rate in September.
The San Francisco Fed president said the central bank planned to hold its rate at a high level until there is progress on inflation.
“The holding part is really important. It is a raise-to-hold strategy,” Daly said. The Fed’s policy stance will get tighter as inflation comes down, she noted.
Asked to comment on the sharp gain in retail sales in October, Daly said that it showed “the consumer is hanging in there.”
But Daly added that contacts in her district tell her that consumers are “stepping back” given the high inflation and preparing for a slow economy.
“That’s a very good start. We’re not there yet obviously, but that’s exactly what we want to see,” she said.
Daly said she was optimistic the Fed could avoid tipping the economy into a deep recession.
“History is on our side. We’re tightening into a strong economy. I still am optimistic we can bring this down so that Americans don’t feel we solved one bad problem and put them in a much worse one,” she said.
Daly estimated a rise in the unemployment rate to a range of 4.5%-5% would likely be sufficiently high to cool the labor market and inflation.
“That would still mean jobs out there for people, but it would just mean you’d have to search longer to get them. That is still a reasonable labor market to have,” she said.
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