Fed's Daly: Would Rather Do Too Much On Rates Than Too Little

San Francisco Federal Reserve Bank President Mary Daly on Thursday said she feels it is time to slow the pace of the Fed's interest-rate hikes, but would rather err on the side of raising rates slightly too far, than to not raise them high enough.

"I would rather move a little bit higher and have to come back then to move a little bit less high and to then tell people we're going to go higher, because at some point it does seep into inflation expectations," Daly said in a virtual appearance before the European Economics & Financial Centre. At the same time, she said, "I don't want to be over tightening to the point where we throw the economy into a sharp recession, but if we are talking about a rate hike on either side, I want to fully get inflation sustainably down to 2% on average."

The Fed should not, she said, repeat the mistakes of the 1970s by stopping policy tightening too early, and allowing higher inflation expectations to get embedded in the economy. Economic historians say that "stop and go" policy likely forced the Fed to raise rates far more dramatically, and send the economy into a much deeper downturn, than otherwise.

"I don't want to be over tightening to the point where we throw the economy into a sharp recession," Daly said.

In September, she said, she had penciled in a top fed funds rate next year of about 4.9%, she said, higher than the median forecast of her colleagues. Given that inflation tends to lag most other economic data and in light of the various headwinds facing the U.S. economy including the slowdown in global growth, "I support a more gradual approach of getting to it so we can be discovering the right rate as we go."

Once there, she said, the Fed needs to keep the policy rate steady to keep pushing down on inflation until it is "well on its way" to the Fed's 2% goal, a strategy she refers to as "raise and hold." Markets are betting otherwise, with interest-rate futures pricing in rate cuts in the second half of the year.

Data published Thursday showing a slowdown in consumer inflation is "good news," but "one month does not a victory make," Daly said.

"We have to be resolute to bring inflation down; we're united in that commitment," she said. "It's raising the rate and then holding it for a length of time that is sufficient to bring inflation reliably back to 2%...I don't I don't see anything in the incoming information that has changed the look of that path, the dynamics of that path," since September.

It's important to be "mindful" and "thoughtful" about raising rates so as to reduce the chance of sending the economy needlessly into a deep recession.