Fed’s Daly: Further rate cuts will likely be needed

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By Ann Saphir

(Reuters) -San Francisco Federal Reserve Bank President Mary Daly said on Wednesday she “fully supported” the decision by the Fed to cut its policy rate last week and expects further reductions ahead.

“Will they come right now, this year or going forward?” Daly said at the University of Utah’s David Eccles School of Business. “It’s hard to say, but what’s really important is that making those policy adjustments will likely be required to balance both of our goals — keep pressure on inflation to bring it to price stability and offer support to the labor market to ensure that it stays near full employment.”

Daly said she does not expect a recession and rejected the idea that the economy is heading toward the high-inflation, high-unemployment environment known as “stagflation.”   

Inflation excluding tariff-driven goods inflation, she said, is probably around 2.4% or 2.5% — still too high compared to the Fed’s 2% goal, but approaching it. And though the labor market has cooled and can no longer be called solid, she said, she wouldn’t call it weak either.

“I’d say it’s sustainable, but … I do not want to see further softening,” she said. “That’s part of why the interest rate decision was very straightforward: You’re taking out some insurance” to support the labor market, even as borrowing costs remain high enough to keep continued downward pressure on inflation. 

“It’s an economy that still needs monetary policy bridling, but not as much as we had,” she said.

Fed policymaker projections released at the end of the September 16-17 meeting showed most U.S. central bankers expect at least one more quarter-point cut this year, and the largest number expect two more. 

Echoing Fed Chair Jerome Powell, Daly said those projections are not promises and noted that the Fed’s actual rate-setting decisions may require assessing tradeoffs between the Fed’s two goals.

Daly had previously said she felt two quarter-point rate cuts this year was a reasonable forecast. On Wednesday she did not provide an update to that view. 

(Reporting by Ann Saphir; Editing by Andrea Ricci and Deepa Babington)