By Ann Saphir
(Reuters) -San Francisco Federal Reserve Bank President Mary Daly said on Thursday that while a half-percentage-point interest rate hike in September "makes sense," she is open to the possibility of a bigger hike to fight too-high inflation.
"I still think 50 basis points is the case, but I am open to 75 should the data evolve differently," Daly told Bloomberg TV, saying she does not want to be "head-faked" by the recent improvement in inflation readings and noting there will be more data on employment and inflation before the Fed's next meeting, on Sept. 20-21.
Daly's hawkish tone came a day after a Labor Department report showed consumer prices did not rise in July from the month before and after a report on Thursday showed producer prices unexpectedly fell in July.
The hint of relief from what had been relentlessly accelerating inflation sent traders of interest-rate futures piling into bets on the 50-basis-point rate hike that Daly sees as most likely at the Fed's upcoming meeting.
Equity markets also rose on the notion that the Fed would soon slow rate hikes. Rising stock prices threaten to undo some of the Fed's efforts to tighten financial conditions and slow the economy by raising borrowing costs.
"We don't want financial conditions to relax," Daly said, noting that she looks not only at the stock market but also at borrowing costs for businesses and consumers as well mortgage rates -- which have risen sharply -- to gauge financial conditions. "I really do want those to remain tight and tight and tightening as we go," she said.
Daly pushed back on market expectations for interest rate cuts to follow swiftly on the current round of rate hikes. Rate futures prices traded at CME Group (NASDAQ:CME) show investors expect the Fed to cut rates by about 50 basis points next year.
"I don't see this hump-shaped part where we raise interest rates to really high rates and then bring them down," Daly told Bloomberg TV. "I think of raising them to a level that we think is going to be appropriate and then holding them there."
Since March, the Fed has raised its short-term policy rate from near zero to a current range of 2.25%-2.5%, and Daly repeated her view that rates need to rise to about 3.4% this year and higher next year to restrict growth and reduce inflation.
Even with the slight easing in price pressures in this week's data, consumers are still paying 8.5% more this year than last year for the same goods and services, a point Daly noted repeatedly in the interview.
"Inflation is too high," she said.