San Francisco Federal Reserve President Mary Daly on Thursday expressed the view that raising interest rates by either 50 or 75 basis points in September is "reasonable" where it is needed to reduce inflation.
"We think it is necessary to raise the rate at least to a neutral level - which is around 3%," said Daly.
When reaching that level, Daly said, interest rates should be maintained in line with the "increase and hold" strategy. That view appears to have pushed prices down in futures markets reflecting expectations for interest rate cuts next year
"The worst thing you can have as a business or a consumer is for rates to go up and then go down quickly ... it can present a lot of uncertainty," Daly said.
"I don't think we want to have this idea that we're going to have an uneven path of rate hikes where rates go up very quickly this year and then come down aggressively next year."
The Fed's rate hike decision next month will depend on how data on inflation, employment and other economic metrics develop, Daly said. However, he also cautioned that with the global economic slowdown acting as a hindrance to U.S. growth, we need to take that into account."
U.S. central bank is committed to bringing inflation back down to the 2% target, he said, and needs to raise rates enough to keep inflation – running at an annual rate of 8.5% according to the widely watched measure of the consumer price index.
"We also don't want to go too far in policy implementation and find that we have tightened the economy more than necessary. It was just an unforced error," Daly said.
"It's a balancing act to make sure we do enough, and make sure we don't overdo it given the risks."
