San Francisco Fed’s Daly: 'There’s still more work to do' on inflation

San Francisco Federal Reserve Bank President Mary Daly said a new report out Thursday showed inflation is coming down but is still too high, leaving the central bank with "more work to do."

"The CPI data came in largely as expected and that is good news," Daly told Yahoo Finance in an exclusive interview, referring to a 3.2% rise in the Consumer Price Index in July over the prior year, a slight acceleration from June's 3% annual increase but in line with forecasts.

"It's also consistent with what we believe will be happening, which is that inflation will gradually make its way down," she added. "But it is not a data point that says victory is ours. There's still more work to do.”

Mary Daly, president of the San Francisco Federal Reserve Bank, poses for a photograph.
Mary Daly, president of the San Francisco Federal Reserve Bank. (Nick Otto for the Washington Post) (The Washington Post via Getty Images)

When looking at "core" inflation, the Fed's preferred inflation gauge that strips out the volatile food and energy categories, prices rose at their slowest pace since October 2021. Core prices increased 4.7% year over year in July, down from 4.8% in June and 5.9% in July 2022.

While trending in the right direction, inflation remains well above the Fed’s 2% target.

Daly said she is highly data dependent and is reserving her judgment for how much work is needed to bring down inflation until the Fed’s September policy meeting, when she will pencil in her projections for interest rates.

Officials penciled in two more rate hikes at their June policy meeting and then raised rates by a quarter percentage point to 5.25% to 5.5% two weeks ago, leaving potentially one more rate hike depending on the data.

Markets are currently pricing in a 90% chance that Federal Reserve maintains its benchmark interest rate in a range of 5.25%-5.50% in September, per the CME FedWatch Tool. Before a recent jobs report and Thursday's CPI release, markets had priced in an 82% chance of a Fed pause next month. In early July, markets had priced in just a 72% chance of that scenario.

Daly said there are factors that could delay inflation’s downward trajectory, from volatile oil prices to housing. Daly said contacts in her district are telling her they’re worried about inflation reaccelerating in some areas of housing.

"Whether we raise another time, hold rates steady for a longer period, those things are yet to be determined and it would be premature to project what I think would happen because there's a lot of information coming in between now and our next meeting," she said.

'I'm going to need to see some traction'

For Daly to feel comfortable to hold interest rates at heightened levels for an extended period of time, she would need to gain confidence that the path of inflation is completely downward through a drop in services inflation excluding housing.

"We do need to see [core services] come back to pre-pandemic levels if we're going to be confident that we can get to 2% on a sustainable basis,” said Daly. "I'm going to need to see some traction in getting there before I feel comfortable that we've done enough."

Part of getting inflation down for the Fed means getting the job market back into better balance by evening out the supply of workers with the demand for workers. Last month, 187,000 jobs were created with downward revisions to the past two months by nearly 50,000 workers, leaving 185,000 jobs created in June and 281,000 in May.

"I see the rebalancing of the labor market as a very necessary part of what we're trying to do," said Daly. "It's also expected as we raise the interest rate, the economy cools and as the economy cools then employers need fewer workers and the labor market comes back into balance."

Despite cooler readings on the job market for the past two months, Daly says the job market isn’t "really quite in balance. It's still hard to find workers. If you're a worker, it's still hard to afford things even though you're making good wages."

Daly said the Fed is mindful that the economy needs around 100,000 jobs per month to keep up with population growth and maintain a balanced job market, but right now closer to 200,000 are being added a month.

"So we're still at levels that are higher than we will expect in the longer run," she said. "We really have to think about, how does that affect our projections of what inflation in the labor market will look like, say in six months, and then what should we do with policy to make sure that we achieve both our goals, price stability and full employment?"

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