Fed’s Daly: Rate Cuts Necessary to Maintain a Healthy Labor Market, According to Reuters

By Ann Saphir

The Federal Reserve must consider interest rate cuts to maintain a healthy labor market, according to San Francisco Fed President Mary Daly. She emphasized that the extent of these cuts will depend on incoming economic data.

Daly explained, "As inflation decreases, we’re seeing a real interest rate rise in a slowing economy, which can lead to over-tightening." She highlighted the importance of sustaining the labor market, warning that overly restrictive policies could further weaken it, which would be undesirable.

While the labor market has softened, Daly noted that it remains robust. Analysts widely anticipate a rate cut during the Fed’s upcoming policy meeting scheduled for September 17-18. Following rapid increases in borrowing costs throughout 2022 and 2023, the Fed has maintained a policy rate of 5.25%-5.50% for over a year to combat inflation.

Most analysts predict a quarter-point reduction at the September meeting, though they are eagerly awaiting the U.S. Labor Department’s monthly employment report for August, set to be released on Friday. This report could provide insight into further potential softening in the job market and influence the Fed’s response.

On Wednesday, financial markets increased expectations for a larger half-point rate cut after government data indicated job openings in July fell to their lowest level in three and a half years, with the ratio of job openings to job seekers now falling below pre-pandemic levels. However, Daly characterized the job market as balanced rather than weak.

"It’s challenging to find evidence of a faltering market," she remarked, adding that wages are increasing faster than inflation, and workers continue to secure jobs. While businesses have reported being cautious with hiring, Daly stated they are not resorting to layoffs.

The Fed reserves more drastic actions for clear-cut situations, like during the pandemic shutdowns, which led to a swift decrease of rates to near zero. Currently, the outlook appears more uncertain. Daly mentioned that during her community visits, inflation remains a primary concern for many.

"We do not have price stability," she asserted, noting that inflation continues to exceed the Fed’s 2% target, necessitating ongoing downward pressure.

Regarding the necessary magnitude of the rate cut, Daly acknowledged uncertainty. "We don’t know yet. We have the labor market report, the CPI report, and other data we need to analyze," she explained. She emphasized the importance of gathering and discussing data with her staff and colleagues before making a decision.

Daly stressed that maintaining the labor market at its current level is crucial for helping people recover from the financial difficulties caused by high inflation, aiming for a scenario where inflation is reduced without harming economic stability. "That’s the goal," she concluded.