The consumer price spikes, which rose the most since 2008 in June, will likely be a temporary feature of an economy recovering quickly from the pandemic, said Mary Daly, president of the Federal Reserve Bank of San Francisco.
Daly, who said she was "bullish" on the economy heading into the fall, said it was now appropriate for the central bank to begin discussing a reduction in its monthly bond purchases, which could begin in late year or early 2022 .
"It is appropriate to talk about scaling back our asset purchases and reducing some of the housing we have made available to the economy," Daly said in an interview with CNBC on Tuesday. "We'll still be in a very accommodating position with a low fund rate, but we don't need all of the tools as we see the economy building itself."
Mary Daly, President of the Federal Reserve Bank of San Francisco, speaks during a Bloomberg Television interview in San Francisco, Calif., On Wednesday, November 13, 2019. Daly said that monetary policy is faced with healthy momentum in the economy and Consumer spending, despite headwinds from weaker corporate investment and production.
David Paul Morris / Bloomberg
According to Labor Department data released on Tuesday, consumer prices rose 0.9% in June, the largest increase since 2008 and 5.4% year-on-year. Used vehicles accounted for more than a third of profits, suggesting higher inflation is likely to be temporary, said Daly, a voter on this year's Federal Reserve Open Market Committee.
"I really see this as temporary, the used cars are really a good example," said Daly. “Used car prices simply reflect the temporary shortages in new car supplies due to the semiconductor chips that have to be built into cars, and people are going back to work and have to buy cars too. All of these things come naturally. "
Fed critics, including some Republican lawmakers, argue the central bank is risking runaway inflation by keeping interest rates near zero and buying $ 120 billion in treasuries and mortgage-backed securities every month. Chairman Jerome Powell can expect to be grilled about the dangers when he appears before the House Financial Services Committee at 12 noon. on Wednesday in Washington and a day later the Senate Banking Committee.
The coronavirus delta variant, which has become the main drag in the US, carries risks to the economic recovery, Daly said, adding that she believes it is not yet time to talk about a rate hike.
"I think it is really premature to talk about rate hikes," said Daly. “Right now, here's what we want to do: We have to get through the fall – the Delta variant is so contagious and it's spreading all over the world and it's actually spreading in the US – that's a risk. We just have to open the economy completely. "
Fed officials raised their expectations for a rate hike at the June meeting, with the median projection of the 18 policymakers showing two rate hikes in 2023, up from none when they released their last forecast in March. Seven out of 18 officials have also announced a price increase next year.
Daly said the Fed will focus on scaling back its bond purchases first and then raising the key rate.
"The next step will definitely depend on the economy and, most importantly, where Covid is going," said Daly.