Daly: Fed may not have to raise rates again if long-term bond yields remain this high

San Francisco Fed President Mary Daly said Thursday if long-term bond yields remain around current levels, then the Federal Reserve won’t need to raise interest rates again.

"The bond market has tightened quite considerably over about 36 basis points since we met in September," Daly said at the Economic Club of New York. "That is equivalent to about a rate hike. So then the need to do tightening additionally is not there."

Long-term interest rates are at their highest levels since 2007 following a recent run-up. This past month 10-year Treasury yields have risen more than half a percentage point to surpass 4.7%.

Daly, a non-voting member of the Fed interest rate setting committee who has been more hawkish this year, noted that if the job market and inflation continue to slow and if financial conditions, which have tightened in the past 90 days, remain tight, then the need for the Fed to take further action is diminished.

"Financial markets are already moving in that direction and then they've done the work. We don't need to do it more," she said.

Fed officials penciled in one more rate hike this year to a range of 5.5%-5.75% before holding rates at that level into next year. Wall Street sees a nearly 80% chance of holding rates at current levels in November.

The Fed has raised rates 11 times since March 2022 in the most aggressive rate-hiking campaign since the 1980s. While inflation has dropped, it remains around 4%, around double the Fed’s target.

Daly says she’s watching the lag effects of the Fed’s interest rate hikes and believes previous rate hikes are still making their way through the economy. This matters because the Fed is at a juncture where the central bank could "easily overcorrect" or "under correct" at this point, she said, and should take its time.

If the Fed holds rates around current levels, that can be considered a continuation of active tightening, according to Daly.

"Even if we hold rates steady exactly where they are today, policy is going to grow increasingly more restrictive as inflation and inflation expectations fall because the real rate will rise," she said. "So holding rates steady, even no change, is an active policy action."

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