Fed’s Daly sees more rate hikes as firms seek to pass on costs

San Francisco Fed President Mary Daly indicated that further interest rate increases may be warranted as businesses attempt to pass higher input costs on to consumers, a dynamic she sees as keeping inflation pressures sticky. The core transmission mechanism runs through inflation repricing: if firms are successfully raising prices, policymakers are likely to view inflation as more entrenched, which pushes expectations for the policy rate higher and widens the rate differential that supports the U.S. dollar and weighs on long-duration assets. Front-end Treasury yields and interest-rate-sensitive equities such as growth and small-cap stocks are most exposed, while rate-sensitive sectors like housing and utilities face pressure from higher discount rates. Traders will be watching the upcoming Consumer Price Index release and the core PCE deflator for evidence of whether pricing power is broadening beyond goods into services, since a firm reading would validate a higher-for-longer rate path.

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