Fed’s Daly: Interest Rates Must Be Lowered to Safeguard Labor Market

The Federal Reserve may need to lower interest rates to safeguard the US labor market, but the extent of any cuts will likely depend on upcoming economic data, according to San Francisco Fed President Mary Daly.

In a recent interview, Daly noted that the “real rate of interest” is increasing in a “slowing” economy, which she described as a “basic recipe for over-tightening.” She suggested that if the Fed’s monetary policy were to become “overly tight,” it could contribute to “additional slowing” in US employment.

Daly emphasized that such a scenario would be “unwelcome.”

These comments come as the Fed prepares for its next two-day policy meeting scheduled for September 17-18, where a decrease in borrowing costs is anticipated. Current rates are at a 23-year high of 5.25% to 5.5%, maintained at this elevated level for over a year following a series of hikes aimed at controlling high inflation.

This week, attention is drawn to significant labor market data, including the crucial August nonfarm payrolls report. Recent statistics indicate a gradual softening in the US employment landscape, with job openings, a measure of labor demand, reaching a three-and-a-half-year low in July.

Despite these figures, Daly asserted that the job openings data reflect a balanced labor market and suggested there is little evidence of it faltering.

Analysts believe that signs of a more pronounced slowdown in the job market could lead the Fed to consider more substantial rate cuts.