Mary Daly, the President of the San Francisco Federal Reserve, has expressed her support for a measured approach to interest rate cuts in a recent interview. This statement comes amidst growing confidence in the Federal Reserve’s ability to tame inflation.
Daly, who is a voting member of the Federal Open Market Committee (FOMC), believes that the U.S. economy is not yet in a position to justify rapid interest rate reductions. She argues for a gradual adjustment to borrowing costs, suggesting that the current interest rate range of 5.25% to 5.5% is appropriate for the time being.
Her comments come ahead of the highly anticipated annual Jackson Hole Economic Symposium in Wyoming, where global central bankers will gather to discuss the future of monetary policy.
While some concerns exist regarding a potential economic slowdown, Daly maintains that the U.S. economy is not in dire straits. She advocates for a cautious and “prudent” approach to rate cuts, emphasizing that “gradualism is not weak, it’s not slow, it’s not behind, it’s just prudent.”
Daly’s stance directly addresses concerns about a possible recession and the pace at which the U.S. will ease interest rates from their 23-year high. She downplays the urgency for a dramatic response to signs of a weakening labor market, stating that the economy is not showing significant evidence of a deep downturn.
She points to the progress made in inflation control as a key factor in her stance. “After the first quarter of this year, inflation has just been making gradual progress towards 2%,” Daly said. “We are not there yet, but it’s clearly giving me more confidence that we are on our way to price stability.”
Despite Daly’s call for caution, investors are currently anticipating a rate cut at the next FOMC meeting, with market pricing suggesting a 70% probability of a quarter-point reduction. This would represent the first decrease in interest rates in four years.
The Federal Reserve’s approach to interest rate cuts has been a subject of intense debate in recent weeks, with conflicting economic data leading to volatile shifts in interest rate expectations. While a 50-basis-point rate cut in September seemed likely earlier in August, recent developments have shifted market expectations towards a more modest 25-basis-point cut.
This debate has also been fueled by economist Claudia Sahm, creator of the Sahm Rule, who has defended the rule’s relevance amidst growing criticism and skepticism, including from Federal Reserve Chair Jerome Powell. Renowned economist Peter Schiff has also weighed in, calling the July Consumer Price Index a “fraud” and questioning its accuracy.
The July consumer inflation data, while suggesting some progress in inflation control, has also raised concerns about the potential for slower economic growth, impacting the Fed’s decisions regarding the pace and magnitude of future interest rate cuts.
