UPDATE 1-Fed's Daly says she's in a 'watch and see' mode on rates

(Adds comments from Daly, Barkin and background)

By Praveen Menon

WELLINGTON, New Zealand, Aug 29 (Reuters) – San Francisco Federal Reserve President Mary Daly on Thursday said she is in a “watch and see” mode as she assesses the need for another U.S. interest-rate cut for an economy that has “strong” momentum but faces headwinds from uncertainty and a global growth slowdown.

“I’m in a watch-and-see position right now,” Daly told reporters after a speech in Wellington, New Zealand, adding that over the next few weeks she’ll be focused on what business contacts and economic data say about consumer confidence and consumer spending as well as inflation.

If inflation, which has been undershooting the Fed’s 2% goal, comes in “more robust, that would be confidence-generating for me,” she said. But if the data is soft, she added “that would be something I would want to consider.”

The Fed’s rate-setting panel meets on Sept. 17-18 to decide on the central bank’s next policy move. Daly said she supported the last month’s rate cut so as to deliver a “slightly accommodative” policy to the U.S. economy.

Financial markets are currently pricing in a near-certain chance next month of at least a quarter-point decrease from the Fed’s current target range of between 2% and 2.25%.

On Wednesday, Richmond Federal Reserve President Thomas Barkin said he too was closely watching developments in the economy, particularly around the outlook for economic growth, but had yet to make up his mind on whether the economy needs another interest rate cut.

Daly’s comments suggested she was more concerned about inflation, saying that allowing inflation to fall persistently short of the Fed’s goal would cut into the central bank’s ability to fight future downturns effectively.

“I’m convinced using our tools early and pre-emptively is better than waiting,” Daly said. “Better to avoid the ditch rather than digging yourself out of the ditch.” (Reporting by Praveen Menon in Wellington; Additional reporting by Jason Lange in White Sulphur Springs, West Virginia; Writing by Ann Saphir in San Francisco; Editing by Sandra Maler)

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