San Francisco Federal Reserve President: The timing for interest rate cuts is gradually approaching, and there may be more than two rate cuts this year
Daly stated that if inflation rises and spreads, or if the job market rebounds, the number of rate cuts needed may be less than two. However, she also warned that a more likely scenario is that more than two rate cuts will be necessary. Looking at multiple employment market indicators, the job market is indeed showing significant softness compared to last year
Mary Daly, President of the San Francisco Federal Reserve, stated on Monday that considering the increasing signs that the U.S. labor market is softening, along with the lack of persistent inflation driven by tariffs, the timing for interest rate cuts is gradually approaching.
Daly commented on the Federal Reserve's decision last week to maintain the short-term borrowing rate in the range of 4.25%-4.50%, saying, "I am willing to wait another cycle, but I cannot wait forever." However, Daly pointed out that this does not mean a rate cut is certain in September, but she also stated, "I tend to think that from now on, every meeting is a live meeting for potential policy adjustments."
The Federal Reserve predicted in its June meeting that it would cut rates twice this year, each by 0.25 percentage points. Daly indicated that this expectation still seems to be an appropriate recalibration, and whether the cuts occur in September and December is not as important as whether they will happen. There are many combinations to achieve these two rate cuts.
Daly added that several important labor market and inflation data will still be released before the September policy meeting, and she will maintain an open attitude.
Daly stated that if inflation rises and spreads, or if the labor market rebounds, the number of necessary rate cuts may be fewer than two. But she also warned that a more likely scenario is the need for more than two rate cuts. If the labor market appears to be entering a softening phase without signs of inflation rising, then preparations for further rate cuts should be made.
Regarding last Friday's non-farm payroll data, Daly believes it does not indicate that the labor market is extremely weak. During an economic transition period, simple employment growth is less informative than ratio indicators like the unemployment rate. The unemployment rate in July only rose by 0.1 percentage points to 4.2%, showing no significant deterioration.
However, she pointed out that a comprehensive look at multiple labor market indicators shows one piece of evidence after another indicating that the labor market is indeed softening significantly compared to last year. If the labor market further weakens, Daly believes this is a concerning development. "I am satisfied with the decision in July, but I am increasingly uncomfortable with repeatedly making the same decision."
At the same time, Daly also stated that there are currently no signs that price increases driven by tariffs are widely permeating inflation data. But she cautioned that if the Federal Reserve waits to confirm that inflation will not have a transmission effect— a process that could take six months or even a year— it would certainly be too late.
Daly concluded that the Federal Reserve is currently facing a "policy trade-off": on one hand, it must determine whether to maintain pressure on inflation, and on the other hand, it must ensure sustainable full employment. This is why Daly believes there is no need to change policy in July, but she also thinks that current policies are increasingly deviating from the intended direction
