Fed’s Daly says more rate hikes likely needed to fight inflation

San Francisco Federal Reserve President Mary Daly said Thursday the central bank will likely need to raise interest rates further to address elevated inflation, though she indicated there is no immediate rush to act.

"My bias is that further tightening will be needed," Daly said at the Stanford Institute for Economic Policy Research. She noted that price pressures are spreading beyond energy and goods into services, where inflation tends to be sticky.

Daly welcomed higher bond yields and tighter financial conditions, saying they "gives us a little more time to make really calibrated decisions."

The Fed official said artificial intelligence is contributing only modestly to inflation and having limited impact on the labor market. "We have an inflation problem, but AI is not doing most of the driving," Daly said.

She pointed to positive momentum for productivity growth, noting work being done suggests more productivity growth may emerge over the next one to three years. Daly said recent repricing in AI valuations does not represent an unwinding of interest or enthusiasm, suggesting there is no risk to growth.

The current economic picture includes a stable labor market, positive growth and productivity growth alongside high inflation, Daly said. "Have to focus on bringing inflation down," she stated.

Daly warned that inflation shocks can compound and cautioned against complacency. "Once services inflation rises it's sticky," she said.

Financial markets are in alignment with where the Fed needs to be, Daly said, adding that tighter financial conditions give the central bank more time to make policy decisions. She noted that the exact timing and magnitude of Fed tightening does not need to be decided immediately.

"We have many many quarters to make policy decisions," Daly said.

She described the current environment as "a perfect storm for hiring," citing AI, uncertainty, and rising input costs as factors dampening hiring activity.