The Federal Reserve should help the economy expand. San Francisco Fed President: It is a "reasonable choice" to cut interest rates one to two more times this year

To achieve sustained price stability and a healthy labor market in the United States is just the beginning. Mary Daly, President of the Federal Reserve Bank of San Francisco, believes that the Federal Reserve not only needs to stabilize the economy but also help achieve sustained economic expansion.

According to the Economic Information APP, on Tuesday, Daly stated: "In the coming months and years, there will almost certainly be economic fluctuations, disruptions, and panics. The Federal Reserve cannot completely prevent the impact of these shocks. But unless such events occur, and with the appropriate monetary policy mix, we can help create conditions for sustained growth."

Daly pointed out that the current state of the U.S. economy is "clearly much better than before," with inflation much lower than the peak in the summer of 2022, and the labor market no longer overheated. She also mentioned that the two longest economic expansions in U.S. history - 128 months in the 1990s and 120 months before the COVID-19 pandemic - are goals worth pursuing.

She said: "Significant changes occurred at that time. Businesses prospered, workers found jobs, and the growth of household income and wealth was widely shared."

Although the current expansion is still in its "early" stages, Daly has already seen similar patterns. The labor force participation rate for core age group workers aged 25 to 54 has reached a historic high, while the income gap between high-wage and low-wage workers is narrowing. "Whether it's the expansion in the 1990s, the last one, or our current expansion, the message is consistent: sustained economic expansion benefits all Americans."

Despite inflation not yet reaching the Federal Reserve's target of 2%, as economic conditions improve, adjustments need to be made to interest rate policy. As a current voting member of the Federal Open Market Committee (FOMC), Daly stated that the Fed lowered the benchmark interest rate by 50 basis points to a target range of 4.75%-5% last month, which was a necessary "recalibration." "The FOMC needed to readjust and made this decision at the September meeting. I believe this adjustment is 'moderate,' recognizing the progress we have made and slightly easing policy, but not completely loosening it."

She also pointed out that the 50 basis point rate cut in September is not the new norm. If inflation continues to gradually decline and the labor market maintains a broadly sustainable pace, Daly believes that it is a "reasonable choice" to cut rates one to two more times this year. However, the pace of rate cuts will depend on the discussions at each meeting.

Daly also cautioned investors and observers not to overinterpret recent comments about "gradual rate cuts." She said: "It's not as important as everyone imagines. It just means we are in an uncertain space and will adjust based on clearer information in the future."

Despite the 50 basis point rate cut in September, Daly believes that monetary policy still has constraints and will continue to put pressure on inflation to ensure it reaches the 2% target.

Currently, the question of where interest rates will ultimately settle is of public concern, but Daly stated that the Federal Reserve is still far from making that decision. The Fed's next interest rate meeting will be held on November 6th and 7th. "The fact is, we have a long way to go before reaching the final rate level. The real decision we need to make next is how quickly we should adjust to that level." Trudy Dai also pointed out that the United States may have a slightly higher neutral interest rate at the end of this economic cycle than when entering the cycle.

She stated that she continues to assess the economic situation and balance the Fed's two main goals: price stability and maximum employment. However, she emphasized that when evaluating data, one should not overly rely on short-term reactions. "Relying too much on data that may be revised can make the situation unstable and may lead to poor policy making."

This caution is particularly important at present, especially after the recent hurricanes. Economists expect the upcoming October employment report (to be released on November 1) to potentially decrease by as many as 100,000 jobs due to the impact of hurricanes Helene and Milton. Nevertheless, Dai stated that the employment report is not the core of her concern. She pointed out that when the economy is at a turning point, one cannot rely on "lagging data."

Dai also mentioned that the current focus is on balancing the Fed's dual goals, which is different from the Fed's approach in the past two years of trying to lower inflation and slow down the economy. "We are not just concerned about high inflation. We must ensure the full achievement of the 2% inflation target while ensuring that the labor market meets the standard of full employment. And this is what people define as a 'soft landing' - ensuring that we achieve the 2% inflation target while avoiding a labor market recession."

"Continuous progress is not inevitable," she said. "We must remain vigilant, act cautiously, continue to assess the economic situation, and balance our two main goals."