As the time has come, interest rates are cut! Daley echoes Powell's dovish tone
San Francisco Fed President Daly believes that the Fed should start cutting interest rates, echoing Powell's views last week, and believes that the timing for policy adjustments has arrived. She emphasized the need to lower the inflation target to 2% and to avoid excessive tightening that could harm the labor market. While there are no clear signs of deterioration at present, attention should be paid to employment indicators. The market expects a reduction space of about 100 basis points this year, and Daly is uncertain about the economic outlook, while expecting recent inflation data to support the intention to cut interest rates
San Francisco Fed President Daly said she believed it was appropriate for the Fed to start lowering interest rates.
Daly said in an interview on Monday, "The time to adjust policy has come."
Daly's comments echoed Fed Chairman Powell's speech last week at the Jackson Hole symposium, where Powell expressed confidence in the path for inflation to return to 2% and said, "It is time to adjust policy now."
Daly stated that the exact policy path cannot be determined at this time, and she did not reveal whether she would support a 25 or 50 basis point rate cut at the meeting on September 17-18. She emphasized that the Fed must bring inflation down to the 2% target level while avoiding damage to the labor market from tight monetary policy.
Daly said, "We don't want to keep policy highly restrictive when the economy is slowing down."
With inflation falling, the highest Fed rates in 23 years have been putting increasing pressure on the U.S. economy. Daly said, "This could lead to over-tightening, hurting the labor market and economic growth."
Daly mentioned that while there are no signs of deterioration in the labor market at present, policymakers need to closely monitor a range of indicators to ensure that employment remains sound. If there are signs of actual weakness, more aggressive action would be necessary.
In recent months, the labor market has shown weaker performance than expected, with the unemployment rate rising to 4.3% in July. The market expects there to be around 100 basis points of rate cuts available this year. The Fed has three more policy meetings in 2024.
Daly stated that given significant uncertainty in the economic outlook, she is not ready to declare that the Fed will move to a neutral rate path. She estimates that the neutral rate after adjusting for inflation could be as high as 1%. Therefore, even with the Fed starting to cut rates, it will remain in a restrictive zone for some time.
Economists expect the inflation data to be released this week to support the Fed's intention to cut rates in September