San Francisco Federal Reserve President Mary Daly on Wednesday indicated that the U.S. central bank is likely to cut interest rates again this year, possibly one or two more times, as policymakers work to keep the economy on a stable footing. Daly’s comments follow the Fed’s recent half-percentage point rate cut in September, which she “fully supported,” citing the need to prevent overtightening and protect the labor market.
Daly emphasized that with inflation nearing the Fed’s 2% target and the economy at full employment, the central bank must be cautious not to derail the progress made so far. “I was more worried about injuring the labor market than accelerating inflation,” Daly said, explaining the rationale behind her support for the recent rate cut. According to Daly, the decision to lower rates was a “recalibration” to ensure real interest rates were aligned with economic conditions. She stressed that the rate cut was not an indicator of a shift toward more aggressive cuts but rather an adjustment to avoid stifling growth.
“We were seeing rising real rates with the policy rate steady, and that was a recipe for overtightening,” Daly said. The focus now, she added, is to avoid further damage to the labor market while continuing to address inflation concerns.
Looking ahead, Daly said the likelihood of one or two more rate cuts this year will depend on how economic data evolves. “We will watch the data, monitor the labor market and inflation, and make adjustments as necessary,” she explained. While the Fed is moving closer to its inflation target, Daly cautioned that no “victory” has been declared yet. She reiterated the need for careful consideration of labor market conditions as the Fed navigates its path forward, aiming to avoid any further slowing in job growth.
Daly downplayed concerns about balance sheet expansion contributing significantly to inflation, suggesting that the Fed’s balance sheet is coming down to more normalized levels without having a major impact on price pressures. As the central bank continues to walk a fine line between maintaining price stability and safeguarding the labor market, Daly’s remarks underscore the Fed’s flexible, data-driven approach to policy as it heads toward the close of the year.
