Fed's Daly says it's time to start talking about slowing rate hikes

© Reuters. FILE PHOTO: San Francisco Federal Reserve President Mary Daly at the Los Angeles World Affairs Council Town Hall, Los Angeles, California, U.S., October 15, 2019. REUTERS/Ann Saphir

By Ann Saphir

(Reuters) - The U.S. central bank should avoid putting the economy into an "unforced downturn" by raising interest rates too sharply, and it's time to start talking about slowing the pace of the hikes in borrowing costs, San Francisco Federal Reserve President Mary Daly said on Friday.

The Fed is widely expected to raise its benchmark overnight interest rate by three-quarters of a percentage point for a fourth consecutive time at a Nov. 1-2 policy meeting, as the central bank battles the highest inflation in 40 years.

The aggressive policy tightening has lifted that rate from the near-zero level in March to the current 3.00%-3.25% range.

"We might find ourselves, and the markets have certainly priced this in, with another 75-basis-point increase," Daly said at a meeting of the University of California, Berkeley's Fisher Center for Real Estate & Urban Economics' Policy Advisory Board in Monterey, California. "But I would really recommend people don't take that away and think, well it's 75 forever."

Fed projections released last month show most of its policymakers believe the federal funds rate will need to rise to between 4.5% and 5% next year to start bringing inflation down toward the central bank's 2% goal. Those projections are still "reasonable," Daly said, adding that she's pinned them to her wall to remind herself of where the rate will end up.

"I hear a lot of concern right now that we are just going to go for broke. But that's actually not how we, I think about policy at all," Daly said.

With rates near the neutral level, where economic activity is neither constrained nor stimulated, Daly said the Fed is moving to a second phase in policy tightening that should be "thoughtful" and "incredibly data-dependent."

"We have to make sure we are doing everything in our power not to overtighten, and we can't pull up too fast, and say we are done," Daly said. Headwinds including the war in Ukraine, an economic slowdown in Europe and ongoing policy tightening by central banks around the world could impact the U.S. economy, she added, and ultimately how high U.S. rates need to go.

With inflation by the Fed's preferred measure running at more than three times the 2% goal and the labor market still strong, Daly said "it's really challenging to step down right now ... We are not there yet."

But, she added, "the time is now to start talking about stepping down. The time is now to start planning for stepping down."