San Francisco Federal Reserve President Mary Daly said on Wednesday that the bank should cut interest rates to ensure the health of the labor market remains strong and sustainable. She added that the final decision on how much to cut will depend on upcoming economic data.
In an interview with Reuters, Daly stressed: “We have to make sure that the health of the labor market remains strong and sustainable. If monetary policy is too tight, it could lead to a further slowdown in the labor market, which would be undesirable in my opinion.”
Daly and her colleagues are expected to cut interest rates at their next policy meeting, scheduled for Sept. 17-18. The Fed has raised borrowing costs significantly in 2022 and 2023, and has kept its benchmark interest rate in the 5.25%-5.50% range for more than a year in an effort to curb inflation.
Most analysts expect the Fed to cut rates by a quarter point at its September meeting. However, analysts are eagerly awaiting the US Labor Department’s monthly employment report for August, due on Friday, which is likely to reveal further weakness in the labor market that could prompt the bank to make a bigger cut. Earlier on Wednesday, financial markets increased their expectations for a half-point rate cut this month. This came after government data showed that job openings in the US fell to a three-and-a-half-year low in July. Moreover, the job openings-to-job seekers ratio, a measure of how tight the labor market is, fell and is now below the pre-pandemic average. But for Daly, the report showed that the labor market is balanced but not weak.
Rate cut nears as labor market report
As for the need to cut rates, Mary Daly stressed: “We are waiting for the labor market report and the CPI report.” She added that she also needs to discuss the data with her staff and monetary policy colleagues. Daly’s comments came shortly after Atlanta Federal Reserve President Raphael Bostic expressed a willingness to start cutting rates even though inflation remains above the central bank’s target.
Bostic, who was previously among the most hawkish policymakers on fighting inflation, has now signaled that his focus is shifting to employment issues as evidence of weakening labor market strength grows. “We cannot wait until inflation is substantially below 2 percent to begin cutting rates, as that could cause labor market disruptions that would cause unnecessary pain and suffering,” Bostic wrote in a letter posted on the Atlanta Fed’s website.
Although Fed officials have reassured markets that the next step will be to cut rates, insufficient progress in reducing inflation, coupled with expectations of higher rates, has raised some doubts about whether the central bank will take any action this year. While Fed futures managers and economists see the likelihood of keeping rates on hold through the end of the year as very low, economists are increasingly convinced that the Fed may wait until September before making any decision on whether to change rates. Nearly two-thirds of economists surveyed (70 of 108) expect the first cut in the federal funds rate in September, to a range of 5.00%-5.25%. The results come from the May 7-13 survey, compared with just over half who expected a cut in September.
The Fed cuts interest rates
“We didn’t get any positive news on inflation in the first quarter,” said the chief economist, who expects the Fed to cut rates twice this year. “All the inflation increases were too big to allow for a rate cut.” For the Fed to cut rates, he added, “we need to see a significant change in direction. One month of good news is not going to be enough, they need several months of positive data.” In the latest Reuters poll, economists generally raised their inflation forecasts for 2024, including the CPI, core CPI, PCE and core PCE, for the second straight month.
None of the inflation measures are expected to reach 2% until at least 2026. “It may not take much to push the start of the easing cycle until November,” economists said. Moreover, the risks to this forecast are heavily tilted toward just one cut in 2024 rather than three. About 60% of respondents to the latest survey (65 of 108 economists) expect a quarter-point cut this year, up from half of respondents in the previous survey.
A more than 60% majority of economists who responded to an additional question (26 of 41 economists) said there is a low or very low chance the Fed will leave rates unchanged for the rest of the year. When asked about estimates of the Fed’s neutral interest rate, which does not stimulate or constrain economic activity, the median estimate of 29 respondents was 3.00% to 3.25%, higher than previous estimates. The U.S. economy, which grew at a slower-than-expected 1.6% annual rate last quarter, is expected to grow 2.4% this year, faster than the 1.8% non-inflationary growth rate that Fed officials currently consider appropriate.
