Mary Daly, the president of the San Francisco Federal Reserve, indicated that the central bank may still consider one or two additional rate cuts this year, contingent on inflation trends and labor market stability.
Economic Indicators Guide Policy
During a Q&A session following her speech in New York, Daly expressed that if inflation remains manageable and the job market stabilizes, further cuts would be a “reasonable thing to do.” However, she cautioned that if inflation proves to be persistently high or if the labor market does not reach a sustainable level, the number of rate cuts could be limited.
Daly’s comments are timely as they reflect ongoing discussions within the Fed regarding the appropriate monetary policy path. Earlier, Fed Governor Chris Waller emphasized the need for “more caution” in cutting rates, while Minneapolis Fed President Neel Kashkari indicated that modest rate reductions are likely in the upcoming quarters.
Focus on Soft Landing
In her address titled “Landing Softly Is Just the Beginning,” Daly reiterated the Fed’s commitment to achieving a soft landing for the economy—managing inflation while avoiding a recession. She remarked that the journey towards this goal is not complete, highlighting the importance of adjusting interest rates in alignment with economic conditions.
“Adjusting interest rates to match the economy is crucial,” Daly stated, emphasizing that it helps avoid the pitfalls of over-tightening while supporting the dual mandate of price stability and maximum employment.
Recent Economic Developments
The Federal Reserve initiated a new rate-cutting cycle in September, lowering its benchmark interest rate by 50 basis points and indicating the possibility of two more quarter-point cuts by the year’s end. Daly referred to this adjustment as “right-sizing,” noting that the Fed has been patient in its approach as it awaited inflation to decline.
While acknowledging that policy remains “restrictive,” Daly mentioned that recent inflation data indicated a slight uptick in prices in September, leading to concerns on Wall Street about the potential for rising inflation and whether the Fed might slow its cutting cycle.
Additionally, a stronger-than-expected jobs report in September raised further questions about the labor market’s strength and its impact on inflation. However, Daly pointed out that many indicators of the job market are approaching pre-pandemic levels, suggesting that the labor market is stabilizing and is no longer a significant source of inflationary pressure.
Commitment to Economic Stability
Daly’s remarks echo those of Fed Chair Jay Powell, who stated on September 30 that the Fed would utilize its tools to maintain economic growth and avoid recession. Powell noted, “Overall, the economy is in solid shape; we intend to use our tools to keep it there.”
As the Fed navigates these complex economic dynamics, Daly’s perspective underscores the central bank’s ongoing assessment of inflation and labor market conditions in shaping its monetary policy decisions for the remainder of 2024.
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