San Francisco Fed President Mary Daly said she supports a rate cut at the U.S. central bank’s meeting next month.
Daly said the labor market appeared more fragile than expected and a sudden deterioration posed a greater risk than a potential rise in inflation.
Although Daly won’t have a vote on the Federal Open Market Committee (FOMC) this year or next, his statements have drawn attention because he generally aligns with Fed Chair Jerome Powell. The Fed is split on whether to hold interest rates steady or cut them on December 9-10.
“I’m not sure we can be proactive in the labor market,” Daly said, noting that the economy has been in a “low hiring-low layoff” equilibrium for a long time, but the likelihood of this equilibrium breaking negatively is increasing. Conversely, he noted that the cost increases caused by tariffs throughout the year have been more limited than expected, and the risk of a sudden jump in inflation is lower.
Daly stated that he believes the Fed can reduce inflation to its 2 percent target without increasing unemployment, and that otherwise it would be a “policy mistake.”
With interest rates falling to the 3.75%-4% range following the cuts at the last two meetings, the futures market is once again strongly pricing in the possibility of a new cut in December, according to CME Group data. This probability had fallen below 50% during the month, but expectations have shifted after New York Fed President John Williams stated that “there is room for a near-term cut.”
However, some Fed officials oppose the reductions, arguing that price pressures, particularly on services inflation and tariff-sensitive goods, could persist. They warn that easing too quickly could put the Fed in a difficult position if economic activity picks up again in 2025.
Daly, however, argues that the Fed should not back down out of caution: “I don’t assume our hands will be tied next year. We will cut rates further if necessary, or raise them if necessary.”
Stating that disagreements within the FED are normal, Daly argued that this is a natural consequence of the uncertain economic environment: “Our job is not to produce consensus; it is to accurately assess the risks.”
*This is not investment advice.
