San Francisco Federal Reserve President Mary Daly on Thursday said that raising interest rates by either 50 or 75 basis points in September would be a "reasonable" way to get short-term borrowing costs where they need to be to bring inflation down.
"We need to get the rate up to neutral at least - which is around 3% - but likely to restrictive territory: a little bit above 3 this year and a little bit more above 3 next year," Daly told CNN International.
Once at that level, Daly said, rates should stay put in what she thinks of as a "raise-and-hold" strategy. That view appears to push back against pricing in futures markets that reflects an expectation for interest rate cuts next year.
"The worst thing you can have as a business or a consumer is to have rates go up and then come rapidly down ... it just causes a lot of caution and uncertainty," Daly said. "I do think we want to not have this idea that we'll have this large hump-shaped rate path where we'll ratchet up really rapidly this year and then cut aggressively next year - that's not what's on my mind."
The Fed's rate hike decision next month will depend on how data on inflation, employment and other economic metrics evolve, Daly said. She also cautioned, however, that with the global economic slowdown acting as a headwind on US growth, "we have to take that into consideration as we ensure that we don't overdo policy."
The US central bank is committed to getting inflation back down to its 2% target, she said, and needs to raise rates enough to make sure inflation - running at an annual rate of 8.5% by the widely watched consumer price index measure - doesn't get embedded in the economy.
"We don't want to overdo policy either and find that we have tightened the economy more than necessary. That would just be an unforced error," Daly said. "This is a balancing act of making sure we are doing enough, and making sure we are not doing too much as we look at all the risks out there."