Federal Reserve's Daly: Tariffs have not yet affected the U.S. economy, rate cuts are not urgent, and there is still room for balance sheet reduction
San Francisco Federal Reserve President Mary Daly stated that she feels reassured by the market's expectation of two rate cuts in 2025, but inflation risks remain, and there is no urgent need for the Federal Reserve to cut rates. Although Trump's tariff policy has increased uncertainty, it has not yet impacted the U.S. economy. She mentioned that there is still room for the Federal Reserve to reduce its balance sheet and that a tighter policy needs to be maintained over a longer period in the future
On April 18th, Eastern Time, 2027 voting member and San Francisco Federal Reserve President Mary Daly expressed that she feels reassured by the expectation that the Federal Reserve will cut interest rates twice in 2025, noting that the U.S. has made "gradual progress" towards its inflation target.
However, she also pointed out that inflation risks are rising compared to a year ago, and the current level of inflation still requires the Federal Reserve to maintain a restrictive monetary policy stance. She stated that while future rate cuts are not impossible, they are "not urgent."
When discussing the new round of tariff policies from the Trump administration, Daly believes that the related uncertainties have not yet impacted the U.S. economy. She mentioned that she has not heard of any corporate layoffs and there are no signs indicating that companies are withdrawing or pausing investment plans on a large scale. However, she added that companies may become "more risk-averse" in the current environment.
Regarding employment, she noted that even with the recent adjustments to immigration policies by the Trump administration, there will not be an "immediate" impact on the labor market.
On the topic of balance sheet policy, Daly stated that the Federal Reserve's level of reserves remains ample, and there is room for further balance sheet reduction (QT). However, it is still unclear how large the QT needs to be to truly achieve the goal of "ample reserves."
In terms of inflation expectations, Daly pointed out that the inflation-adjusted neutral interest rate is close to 1%, while long-term inflation expectations remain anchored around 2%. In her view, the Federal Reserve needs to continue on a "gradual" policy path and may have to maintain tighter monetary policy for a longer period.
Additionally, Daly mentioned that the volatility in financial markets is in line with expectations