Fed’s Daly says data now justifies cutting interest rates

San Francisco Federal Reserve Bank President Mary Daly said Thursday that she now supports cutting interest rates.

“With the information we have received today, which includes data on employment, inflation, [gross domestic product] growth and the outlook for the economy, I see it as likely that some policy adjustments will be warranted,” Daly said in a roundtable with reporters.

Daly wouldn’t comment on the timing of the first cut or on how many moves she favored.

She said it was important to tell the market where policy was headed and that the specifics would depend on future data.

The Fed’s latest formal forecast shows officials are divided between one or two quarter-percentage-point cuts by the end of the year.

The Fed’s interest-rate committee meets again July 30-31.

Daly said that every meeting is a live meeting for a possible move. She said she had more information to gather ahead of the upcoming meeting, and also said she wasn’t calling for an immediate cut.

Asked if there was evidence the Fed should have already lowered rates, Daly said she didn’t think so.

“If I thought that we were behind, then I would be calling for adjustments immediately — and I don’t see that as being the case,” she said.

Traders in derivatives markets now see less than a 10% chance of a rate cut in July.

Traders see almost a 90% chance of a cut at the following Fed policy meeting, which is set for mid-September.

The Fed has kept rates steady in the range of 5.25% to 5.5% for almost a year.

Federal Reserve Chair Jerome Powell and other central-bank officials have noted that the labor market has cooled in recent months. Economists have said a softening of the labor market was needed for the Fed to cut rates.

Earlier Thursday, the Labor Department released the June consumer inflation data, which came in weaker than expected, with broad-based softness in prices.

After the data was released, former Fed governor Larry Meyer said there was “nothing holding them back” from cutting rates.

Meyer said, however, that he thought July was too soon for a move. Some Fed watchers have said such an unexpectedly swift move might spook the markets into thinking the Fed knew something bad about the outlook.

Other economists, and likely some of Daly’s colleagues at the Fed, think there are risks of moving too soon and that the central bank should be cautious.

In her comments, Daly said the Fed was in risk-management mode.

“We really want to get to a place where inflation consistently comes down to 2% and we’re able to foster the conditions that allow the labor market to continue to be solid. Those are the goals,” she said.

At the moment, inflation is coming down gradually, and the labor market is also gradually slowing, Daly said.

Daly said her opinion was that this suggests that one or two rate cuts this year would be appropriate.

But how the Fed decides to lower rates “is not set in stone,” she said.

Daly talked in terms of “normalizing” policy. She and other Fed officials don’t talk about “easing” monetary policy and argue that they are making the benchmark rate less restrictive on demand.

For Daly, a neutral benchmark interest rate would be in the range of 2% to 3%, and only rates lower than that range would qualify as easing.


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