The president of the US Federal Reserve Bank of San Francisco, Mary Daly, said on Monday that it was time to cut interest rates, with the first rate hike likely to be by a quarter of a percentage point.
In an interview with Bloomberg TV, Daly said it was difficult to imagine a scenario that would prevent the Federal Reserve from cutting interest rates at its upcoming monetary policy meeting on September 17-18.
Daly added that the “most likely” outlook was a further gradual decline in inflation accompanied by steady and sustained employment growth.
If this forecast proves true, they believe it would be appropriate to adjust monetary policy at the Fed’s usual pace in quarter-percentage point increments.
The Fed, which had implemented a series of aggressive interest rate hikes – including four consecutive 75 basis point hikes in 2022 – has kept its benchmark interest rate stable in the range of 5.25 to 5.50 percent since July 2023 as part of its efforts to combat rising inflation.
Daly said the Fed must remain vigilant, even though there have been no signs of deterioration in the labor market so far.
She said any emerging weakness would justify a more aggressive approach to cutting interest rates to avert economic damage.
Daly echoed the sentiments of Fed Chairman Jerome Powell, who spoke at the Jackson Hole conference last week, saying that “the direction of change is downward” and stressed that “now is the time for adjustment.”
Powell had also signaled that progress in reducing inflation and the cooling of the labor market justified the start of interest rate cuts.
Inflation, as measured by the Fed’s preferred personal consumption expenditures (PCE) price index, rose 2.5 percent in July from a year earlier, well below its peak of around 7 percent in 2022 but still above the Fed’s target of 2 percent.
Meanwhile, the unemployment rate in the US was 4.3% in July, almost a full percentage point higher than a year earlier, but still at a historically low level.
Daly also warned against maintaining overly restrictive policies in a weakening economy. He warned that persistently high interest rates and falling inflation could harm both the labor market and general economic growth.
“We do not want to end up in a situation where we pursue extremely restrictive policies despite a weakening economy,” Daly said.
“Remember: every time inflation falls, policy becomes more restrictive. And I think that’s a recipe for too tight monetary policy, which is harmful to the labor market and growth.”
