San Francisco Federal Reserve President Mary Daly says the Federal Reserve (the Fed) will be patient and slow to adjust interest rates as inflation improvements continue. As Daly addressed the Commonwealth Club World Affairs of California this week, she provided keen insights into her thinking process. The Fed’s key message was clear; higher interest rates will remain in place until they fully achieve their purpose.
She noted that the demand side of the economy is measurably weakening, and expects the Fed will need, at some point, to shift its focus toward employment support. This cautious approach to current inflation and future jobs reflects the Fed’s dual mandate; trying to reach the highest employment numbers while keeping prices as stable as possible.
Inflation Still Stubborn
In her address, Daly, a voting member of the Federal Open Market Committee (FOMC), highlighted the ragged progress on inflation. While annual inflation has dipped from its 2022 peak above 7% to 2.7% in April (based on the PCE price index), it remains stubbornly above the Fed’s 2.0% target.
Daly attributes the initial decline in inflation to the rapid improvements in supply chains, a crucial factor, and the additional boost from labor force growth. However, moving forward, she expects the higher interest rates to dampen demand as the rates bring inflation down further.
Signs of Job Market Cooling
With supply chains mostly recovered and labor-force participation nearing pre-pandemic levels, future inflation control will likely depend more on demand restraint. Daly highlighted the potential for a more significant decrease in the labor market as demand slows. This is because job openings numbers are not as high as they used to be. Therefore, future reductions might impact actual jobs rather than just the number of vacancies.
Inflation vs. Employment
In her talk this week, Daly reiterated the Fed’s commitment to its dual mandate. “We will need to keep our eyes on both sides of our mandate—inflation and full employment—as we work to achieve our goals,” she said. The Federal Open Market Committee (FOMC) has maintained the federal funds rate at a range of 5.25% to 5.50% since July 2023. Predictive futures pricing on Monday indicated a nearly 70% chance of a quarter-point rate cut at the FOMC’s September meeting.
Additionally, there are high odds of two rate cuts by the end of 2024, further shaping the future of monetary policy. She acknowledged the delicate balancing act the Fed faces. While inflation remains a concern, a significant slowdown in the labor market could pose another risk. The Fed must closely monitor both sides of its mandate to ensure a soft landing for the economy.
Key Takeaway
San Francisco Fed President Mary Daly says the Fed remains on hold as it navigates the crosswinds of persistent inflation and a cooling labor market. Her address reminded the audience of the Fed’s delicate balancing act between curbing inflation and supporting high employment. As increased interest rates work to slow demand, the Fed is prepared to adjust its policies based on evolving economic conditions. This readiness ensures it meets its dual mandate of stable prices and full employment.
Daly’s cautious stance reflects the need for continued vigilance on both fronts. While the market anticipates future rate cuts, the Fed’s next move will depend on incoming economic data and its assessment of progress toward its dual mandate goals.
