Federal Reserve Bank President Mary Daly Supports Potential Rate Cuts Amid Economic Data

In a recent roundtable with reporters, San Francisco Federal Reserve Bank President Mary Daly announced her support for cutting interest rates. This shift in stance comes in light of new economic data covering employment, inflation, GDP growth, and the broader economic outlook.

“With the information we have received today, which includes data on employment, inflation, [gross domestic product] growth, and the outlook for the economy, I see it as likely that some policy adjustments will be warranted,” Daly stated.

However, Daly refrained from specifying the timing of the first rate cut or the number of potential rate adjustments. She emphasized the importance of guiding market expectations while keeping decisions data-dependent.

The Federal Reserve’s latest forecast indicates a division among officials, with some advocating for one or two quarter-percentage-point cuts by the year’s end. As the next Federal Reserve interest-rate committee meeting approaches on July 30-31, Daly underscored that every meeting is a potential venue for policy changes, though she clarified she is not calling for an immediate rate cut.

Daly dismissed the notion that the Fed had delayed necessary rate reductions. “If I thought that we were behind, then I would be calling for adjustments immediately — and I don’t see that as being the case,” she remarked.

Currently, derivatives markets suggest less than a 10% chance of a rate cut in July, but anticipate nearly a 90% probability of a cut in mid-September. The Federal Reserve has maintained interest rates in the range of 5.25% to 5.5% for nearly a year.

Recent remarks by Federal Reserve Chair Jerome Powell and other officials indicate that the labor market has cooled in recent months. Economists believe this softening is a prerequisite for the Fed to consider rate cuts. The latest consumer inflation data from the Labor Department, released earlier Thursday, showed weaker-than-expected inflation with broad-based price softness.

Former Fed Governor Larry Meyer commented that there was “nothing holding them back” from cutting rates based on the latest data, though he deemed a July move premature. He cautioned that an unexpectedly swift cut could alarm markets into thinking the Fed had concerning insights about the economic outlook.

Daly’s comments reflect a balanced approach, focusing on risk management. “We really want to get to a place where inflation consistently comes down to 2% and we’re able to foster the conditions that allow the labor market to continue to be solid. Those are the goals,” she said.

She noted that while inflation and the labor market are gradually cooling, the economic conditions suggest that one or two rate cuts this year might be suitable. However, Daly emphasized that the Fed’s approach to lowering rates is flexible and not predetermined.

Daly and other Fed officials prefer to describe their policy adjustments as “normalizing” rather than “easing.” They argue that the aim is to make the benchmark rate less restrictive on demand rather than aggressively stimulating the economy. Daly views a neutral benchmark interest rate as being in the range of 2% to 3%, with only rates below that range constituting easing.

As the Federal Reserve navigates these economic conditions, Daly’s measured stance underscores the importance of careful, data-driven decision-making in shaping future monetary policy.

It sounds like we will be seeing a rate drop soon, September more likely than the end of July. What are your thoughts?

This blog post is based on information from a recent article detailing statements made by San Francisco Federal Reserve Bank President Mary Daly. You may read about it here