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The Fed’s Daly: Hot CPI print shows 'the data not cooperating'

San Francisco Fed President Mary Daly told Yahoo Finance that she expects the Fed to stay the course when it comes to expectations for interest rate hikes after the latest core inflation reading — i.e., consumer prices excluding volatile food and energy prices— came in at a 40-year high.

“It does show the data not cooperating," Daly said on Yahoo Finance Live when asked about the consumer price index report for September. “It was a very disappointing report, but I would offer it wasn't that surprising. We would hope that inflation would start to come down faster, but I was prepared for it to just be sluggish.”

Daly noted that CPI, a widely watched measure of inflation, is a lagging indicator and just one data point that is evaluated by the Fed in conjunction with signs the labor market is cooling and that housing market is softening. She also pointed to retail sales in September, which showed flat spending.

“It’s really another sign that we're getting some cooling and that will eventually feed through to inflation,” she said.

Overall CPI rose 8.2% year-over-year last month, down slightly from a clip of 8.3% in August reading. But stripping away volatile food and energy prices, so-called core CPI accelerated by 6.6% year-over-year from 6.3% in August and 5.9% in July. Much of what drove the core rate was an uptick in service prices, largely from rents, causing economists and analysts to point to industry reports outside the CPI data that show rents cooling as opposed to rising.

Taking CPI as a lagging indicator along with other signs of economic cooling, Daly doubled down on the Fed’s projections for future interest rate hikes, saying that the committee's projections laid out in September are still a good guide.

Daly added that raising the Fed’s benchmark interest rate to between 4.5% and 5% next year and getting above 4% this year is still a “reasonable” way to think about rates.

“There's literally no doubt in my mind that we need to put a more restrictive stance of policy in the economy to further get demand and supply in balance,” she said.

At the same time, Daly stressed that the Fed is not on a pre-set course.

“We are a data-dependent Fed, and if more is necessary, we'll take it. If less is necessary, we'll adjust,” she explained. “But we're not talking about, at this point... pausing or stopping, nor are we talking about changing our overall strategy, because the data are coming in about like we would expect.”

Daly stressed that rather than hearing all that much about an imminent recession from her constituents across nine states, she is being told concerns about finding more workers and asked about stubbornly high inflation. Overall, she added, her business contacts expect a short-lived and shallow slowdown.

“That's a very different landing," Daly said. "That would, in my mind, is the soft landing we're trying to achieve."

Daly’s latest comments come as the Federal Reserve has raised its benchmark interest rate by three percentage points so far this year and is on track to raise rates by another one and a quarter percentage points before 2023. Fed officials have spoken in unison that they are committed to getting inflation back down to the central bank’s two-percent target and will “keep at it” until the job is done.

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