Fed’s Daly Agrees With Powell View That It’s Time to Cut Rates

(Bloomberg) -- Federal Reserve Bank of San Francisco President Mary Daly said she believes it’s appropriate for the US central bank to begin cutting interest rates.

“The time to adjust policy is upon us,” Daly said Monday in an interview with Bloomberg Television’s Michael McKee.

Daly’s remarks echoed comments from Fed Chair Jerome Powell, who said last week at the Jackson Hole symposium he has gained confidence that inflation is on a path back to 2% and “the time has come for policy to adjust.”

The San Francisco Fed chief said its too early to know the exact path of policy and declined to say whether she would support a quarter or half percentage-point rate cut at the central bank’s Sept. 17-18 meeting. She emphasized the Fed must bring inflation down to its 2% target, but also that she and her colleagues will seek to prevent tight monetary policy from harming the labor market.

“We don’t want to get ourselves into a situation where we’re keeping policy highly restrictive into a slowing economy,” Daly said.

The San Francisco Fed chief noted that as inflation falls, the Fed’s interest rates — which have been at a 23-year high for more than a year — put increasing pressure on the economy. “That’s a recipe for over-tightening and injuring the labor market and growth,” she said.

While the labor market is not yet showing signs of deterioration, policymakers need to keep a close eye on a variety of indicators to make sure hiring doesn’t falter, Daly said. If there are signs of real weakness, it would be appropriate to be more aggressive, she said.

The labor market has weakened more than anticipated over the past few months, with the jobless rate rising to 4.3% in July. Markets now forecast about 100 basis points in cuts this year. The Fed has three policy meetings remaining in 2024.

Daly said she doesn’t want to declare that the Fed is on a path to neutral because significant uncertainty remains over the outlook for the economy. She estimated the neutral rate of interest could be as high as 1%, on an inflation adjusted basis. So even as the Fed begins cutting rates, it will remain in restrictive territory for some time, she said.

Economists expect inflation figures due this week will support the Fed’s intention to reduce rates in September.

(Updates with additional Daly comments from fourth paragraph.)