Mary Daly Signals Possible Fed Rate Cuts Ahead

Mary Daly, President of the Federal Reserve Bank of San Francisco, indicated that the Federal Reserve might soon lower interest rates. “The time to adjust policy is upon us,” Daly remarked in an interview with Bloomberg Television’s Michael McKee on Monday. Her comments indicate a potential shift in the Fed’s approach to monetary policy as inflationary pressures ease.

Alignment with Fed Chair Jerome Powell

Daly’s views resonate with those expressed by Fed Chair Jerome Powell at the recent Jackson Hole symposium. Powell conveyed confidence that inflation is progressing toward the 2% target, which may prompt necessary policy adjustments. Both Daly and Powell seem to agree that the current economic conditions could warrant a recalibration of interest rates.

Daly and Powell’s views align, suggesting economic conditions may justify recalibrating interest rates toward the 2% inflation target,according to wall street journal subscription deals.

Uncertainty on Specific Rate Cuts

Despite general agreement on the need for policy changes, Mary Daly stopped short of specifying the exact adjustments required. She did not indicate whether she would advocate for a quarter-point or half-point reduction at the Fed’s upcoming meeting. The meeting is scheduled for September 17-18. Daly emphasized the importance of carefully managing the transition to avoid excessive impacts on the labor market while aiming to bring inflation down to the 2% target.

Concerns Over Economic Pressure

Mary Daly raised concerns about the current economic pressure exerted by the Fed’s existing interest rates, which have been at a 23-year high for over a year. She cautioned that maintaining these high rates might lead to over-tightening, potentially causing harm to both the labor market and overall economic growth. This, she noted, could undermine the positive effects of monetary policy adjustments.

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Monitoring Labor Market and Inflation

Although the labor market hasn’t shown significant signs of weakening, Daly stressed the need for vigilant monitoring of economic indicators. She aims to prevent a decline in hiring and overall labor market health. Recent data revealed an uptick in the unemployment rate to 4.3% in July, raising concerns about potential economic softness. Markets are anticipating around 100 basis points in rate cuts for the remainder of the year, focusing on the three remaining Fed policy meetings in 2024.

Uncertainty Around Neutral Interest Rate

Daly also addressed the uncertainty surrounding the Fed’s path forward. She noted that declaring the Fed is moving to a neutral stance is premature. Given substantial uncertainties in the economic outlook, the neutral interest rate—adjusted for inflation—could be as high as 1%. Consequently, even as the Fed begins to reduce rates, it is likely to maintain a restrictive stance for an extended period to ensure economic stability.

Expectations for Inflation Data

Looking ahead, economists expect upcoming inflation data to play a crucial role in shaping the Fed’s decision-making process. The anticipated data will likely influence the central bank’s approach to rate cuts in its September meeting, as it seeks to balance inflation control with economic growth and employment stability.

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