Fed's Daly: More rate hikes likely, timing still under consideration

Source Fxstreet

Federal Reserve (Fed) President Mary Daly said on Wednesday that the central bank will probably need to increase short-term interest rates further ‌to rein in too-high inflation. However, she also signaled there's no need to do so at the Fed's October 27-28 meeting.

Key quotes

CPI indicates gas prices boosting headline inflation, core inflation remains stubborn as anticipated.

More rate hikes likely, timing still under consideration. 

Feels rash to respond when there is time to decide carefully. 

Uncertain if inflation will ease as shocks fade or worsen if shocks continue. 

No urgency, better to be thoughtful and deliberate. 

Risks to above-target inflation remain high, steady labor market allows focus on price stability.

Reassuring that after markets' initial robust reaction to CPI data, trading is calmer. 

Markets grasp Fed's response. 

Fed has responsibility to communicate clearly, be transparent, accountable. 

Market reaction 

At the press time, the US Dollar Index (DXY) is up 0.26% on the day to trade at 102.47.

Daly stresses patience on rates but keeps Fed firmly hawkish

Fed’s Daly delivers a moderately hawkish message, with a FXS Speechtracker score of 6.8/10, slightly above the 6.1/10 historical average and signaling a firmer stance relative to the established baseline. The emphasis that headline CPI is being lifted by gas prices while core inflation remains “stubborn,” alongside the remark that more rate hikes are likely but timing should be “thoughtful and deliberate,” underscores a cautious but tightening bias that supports the Dollar. The focus on persistent above-target inflation risks, a steady labor market, and the reassurance that markets understand the Fed’s reaction function reinforces a message of sustained vigilance on price stability rather than imminent policy easing.

The FXS Fed Sentiment Index slipped by 0.84 points to 128.17, indicating a modest pullback in perceived hawkishness despite remaining well above the neutral 100 mark. This keeps the Fed firmly in hawkish territory, suggesting that while the immediate rate-hike urgency has eased slightly, Daly’s communication as captured by the FXS Speechtracker still supports a bias toward tighter policy rather than a dovish pivot.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.



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