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Fed determined to fix 'problematic' inflation, Daly says

Kitco News

Oct 5 (Reuters) - The U.S. central bank would step in if markets stopped functioning properly, San Francisco Federal Reserve President Mary Daly said on Wednesday, adding that the current situation did not warrant such a move and the Fed is sticking to its plan to curb inflation with more interest rate hikes.

"We definitely don't raise rates until something breaks; we actually are forward-looking," Daly told Bloomberg TV in an interview, adding that policymakers don't rely only on models but gather information from business and community leaders to shape their policies. "You are constantly calibrating through this data dependence to risks" of not doing enough to slow the economy, or doing too much.

Right now, she said, the economy is working well, and markets are functioning.

"We always have the lender-of-last-resort responsibilities, and if market dislocation should come about then we would be prepared to use that, but that's not what I'm seeing right now," she said.

What the Fed does see, she said, is that "inflation is problematic, and we are committed to restoring price stability" by raising rates further.

The Fed is expected to deliver a fourth straight 75-basis-point rate hike when it meets early next month, as it tightens monetary policy more aggressively than it has done since the 1980s to ease price pressures that have stayed higher for longer than policymakers had expected.

Global stock markets have gyrated as investors try to calibrate when the Fed's rate hikes could end, and policymakers like Daly have stuck firmly to their message that the tightening will only end when inflation comes down.

U.S. equities on Wednesday lost ground as fresh economic data showed hiring in the services sector sped up despite the rise in borrowing costs.

CLEAR PATH

The Fed's benchmark overnight interest rate is currently in the 3.00%-3.25% range, and policymakers have signaled they expect it to rise further to 4.6% next year as they address inflation that is, when using the Fed's preferred measure, running at more than three times the central bank's 2% target.

Daly said she hopes the U.S. Labor Department's jobs report for September, due to be released on Friday, will confirm the start of a hiring slowdown that her business contacts have cited. She also hopes the release next week of the monthly consumer price index report, the most widely followed gauge of U.S. inflation, will show underlying price pressures either stabilizing or falling.

Those data points, she said, will inform her own decision as to the pace of the Fed's rate hikes.

But overall, she emphasized, the "path has been very clear: we are going to raise the rate until we get into restrictive territory, and then we are going to hold it there" until inflation comes down closer to 2%.

Daly said she does not expect that to occur until 2024.

"It really is the idea that you hold for a while so that we can see inflation come back down, and our path hasn't really changed; we haven't pivoted on that and we're resolute at restoring price stability," she said. "We're in a vulnerable position when we have high inflation."

Reporting by Ann Saphir; Editing by Chizu Nomiyama and Paul Simao
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