With the latest release of the US Consumer Price Index (CPI) and Producer Price Index (PPI) releasing positive news one after another, the market has increased its bets that the Federal Reserve's interest rate hike cycle has ended and that interest rate cuts will begin next year. But Mary Daley, the chairman of the San Francisco Federal Reserve, warned that if we declare victory against inflation too early and then have to raise interest rates again, it will endanger the credibility of the Federal Reserve.
Daley said in an interview with the media on Wednesday that recent economic data shows a further slowdown in inflation, which is "very, very encouraging", indicating that the Federal Reserve's policies are effective.
But Daley refused to rule out the possibility of further interest rate hikes, citing uncertainty about whether the measures taken by the Federal Reserve are sufficient to reduce consumer price index (CPI) growth to the target level of 2%.
She said the Federal Reserve should "think carefully, take it slow, and not rush to make judgments or announce whether inflation is really slowing down".
Daley is concerned about the outcome of the Federal Reserve saying it has completed tightening monetary policy, but then having to suddenly reverse direction. She warned that a "stop and go" policy would ultimately damage the credibility of the Federal Reserve.
Daley stated that she expects inflation related to the housing and service industries to further decline, but will continue to focus on whether demand recovery or new supply issues threaten signs of improved inflation.
Daley also predicts that US economic growth will cool down, but she believes that the risk of a significant economic slowdown or a sharp increase in unemployment has been reduced.
When asked about the path of interest rate cuts next year, Daley stated that the focus of the current debate will not be on relaxing policies, but on "normalizing" interest rates after a period of "very restrictive" policies.
Daley stated that when weighing monetary policy, she will use inflation expectations for the next year and the performance of the real economy as measurement criteria. She added that the rate cut "will not happen for the time being".
It is worth noting that Daley holds voting rights for the Federal Reserve's FOMC in 2024.
Since July of this year, the Federal Reserve has stabilized its benchmark policy interest rate at a 22-year high of 5.25% to 5.5%, and seems prepared to continue to hold its ground at the last meeting of this year.
Daley stated that excessive tightening of monetary policy - causing unnecessary economic pain and unemployment - is generally balanced with the risk of taking too few measures and stabilizing inflation at a higher level.
In recent days, the US government bond yield has reversed its trend and turned into a significant decline, which Daley expressed little concern about. A decrease in bond yields can lead to a loosening of the financial environment. Federal Reserve officials have stated that if bond yields continue to rise, it may offset the need for further interest rate hikes by the Federal Reserve.