Interest rate cut expectations escalate again! San Francisco Federal Reserve President Mary Daly shifts from wait-and-see to supporting a "three consecutive cuts" on the table

According to the Zhitong Finance APP, Mary Daly, a voting member of the Federal Open Market Committee (FOMC) and President of the San Francisco Federal Reserve, stated on Monday local time that given the increasing signs of a weakening U.S. non-farm employment market and the absence of sustained inflation driven by tariff policies, the timing for the Federal Reserve to restart interest rate cuts is approaching. She expects that it is more likely this year that the Federal Reserve will need to cut rates more than twice.

Before Daly, who has traditionally held a hawkish stance, made her dovish remarks, expectations for rate cuts surged significantly following the release of an extremely weak U.S. non-farm employment report last Friday, which can be described as a "snowball decline." This report not only revealed a mere 73,000 jobs added in July but also unexpectedly revised down the employment data for May and June, cutting a total of up to 258,000 jobs, with a downward revision of an unprecedented 90%.

Pricing in the interest rate futures market shows that traders are heavily betting on the restart of the Federal Reserve's rate-cutting cycle, with the probability of a rate cut next month approaching 90%—up from less than 40% before the non-farm report was released. There are also bets on at least two rate cuts by the end of the year, with some speculating on consecutive cuts of 25 basis points in September and October, along with a 25 basis point cut in December, totaling three cuts of 75 basis points by year-end.

In response to the weak employment report, Rick Rieder, Chief Investment Officer of Global Fixed Income at BlackRock, stated, "This report provides important evidence for the Federal Reserve to adjust rates in September, so the only question is how much the adjustment will be. The likelihood of a 50 basis point cut in September is continuously increasing—if the labor market weakness worsens or job additions remain below 100,000."

"While I would be willing to wait for another decision cycle, I cannot wait indefinitely," Daly emphasized when discussing last week's FOMC decision to maintain short-term borrowing costs in the 4.25%-4.50% benchmark range rather than cutting rates. Previously, two of her Fed colleagues supported a rate cut in July, and U.S. President Donald Trump has repeatedly urged Fed Chair Jerome Powell to initiate a rate-cutting initiative, even suggesting that the Federal Reserve Board take direct control.

This does not mean that the Federal Reserve will necessarily cut rates in September, she added, "but I tend to think that from now on, every monetary policy meeting will be an 'active' meeting for discussing policy adjustments." Daly stated in an interview.

The dot plot released in June showed that Federal Reserve policymakers had generally expected to cut rates twice this year, each by 25 basis points. Daly mentioned in the interview that this "still seems to be an appropriate recalibration magnitude. Whether it has to be implemented in September and December is not that important; what matters is that we may ultimately implement... there are many combinations for achieving two rate cuts."

Daly noted that there are still several key economic data points to be released before the September FOMC monetary policy meeting, including a labor market report and multiple inflation reports, and she will keep an open mind regarding the rate-cutting decision.

"If inflation rises and spills over, or if the labor market quickly rebounds, we could certainly see fewer than two rate cuts," she said. "But I think it is more likely that we may need to cut rates more than twice... Therefore, if the labor market appears to enter a period of weakness while inflation remains unaffected, we should also be prepared to take further action "More than two rate cuts mean that the remaining three Federal Reserve FOMC policy meetings this year will all result in rate cuts, marking three consecutive cuts.

The report from the U.S. Department of Labor last Friday showed that U.S. businesses added only 73,000 non-farm jobs in July, while the previous two months' job additions were significantly revised down to a total of just 33,000.

However, Daly believes that these numbers do not indicate that the U.S. labor market, which is crucial for the U.S. economy, is in jeopardy. 'During periods of economic volatility, raw labor market employment data is often less informative than proportional indicators like the unemployment rate. The unemployment rate in July only rose by 0.1 percentage points to 4.2%,' Daly added.

Nevertheless, she stated that after reviewing a set of labor market dashboard indicators, it is evident that 'one piece of evidence after another' shows that the labor market is clearly softening compared to last year.

'If it further weakens, it will be an unpleasant outcome,' she said. 'I am satisfied with the decision in July, but making the same decision repeatedly may become increasingly difficult to accept.'

At the same time, she pointed out that there are no signs that the price increases triggered by Trump's tariff policies are more broadly permeating inflation data. If the Federal Reserve waits long enough to be sure that there will be no tariff-driven inflationary pressures—this process could take six months to a year—then the Federal Reserve FOMC's monetary policy actions will 'definitely' be too late.

'The Federal Reserve is moving towards a "trade-off zone," where it must determine how monetary policy can continue to exert downward pressure on inflation while ensuring sustainable job growth,' she stated in an interview. 'That is why I believe there is no need to change monetary policy in July, but I also think that as the economic situation evolves, the policy and economic conditions are becoming increasingly mismatched.'