The Federal Reserve should help the economy expand San Francisco Federal Reserve Chairman: Cutting interest rates once or twice this year is a “reasonable choice”

Achieving continued price stability and a healthy labor market for the US economy is only the beginning. San Francisco Federal Reserve Chairman Daly believes that the Federal Reserve should not only stabilize the economy, but also help achieve continuous economic expansion.

The Zhitong Finance App learned that on Tuesday, Daly said, “In the next few months and years, there will almost certainly be economic fluctuations, disruptions, and fears, and the Federal Reserve will not be able to completely prevent the impact of these shocks. But unless such an event occurs, and with the right mix of monetary policies, we can help create the conditions for continued growth.”

Daly pointed out that the current state of the US economy is “obviously much better than before,” inflation is much lower than the peak in summer 2022, and the labor market is no longer overheated. She also mentioned that the two longest economic expansions in US history — 128 months in the 90s and 120 months before the COVID-19 pandemic — are goals worth pursuing.

“There were significant changes at the time,” she said. Businesses prosper, workers find jobs, and the growth in household income and wealth is widely shared.”

Although the current expansion is still in its “early stages,” Daly is already seeing a similar pattern. The labor force participation rate of workers in the 25-54 core age group has reached a record high, while the income gap between high-wage and low-wage workers has also narrowed. “No matter what expansion—the 90s, the last one, or our current expansion—the message is the same: continued economic expansion benefits all Americans.”

Although inflation has yet to reach the 2% target set by the Federal Reserve, interest rate policies need to be adjusted accordingly as economic conditions improve. As a current voting member of the Federal Open Market Committee of the Federal Reserve, Daly said that the Federal Reserve lowered the benchmark interest rate by 50 basis points to the 4.75%-5% target range last month, which is a necessary “recalibration.” “The FOMC needed to be readjusted and made this decision at the September meeting. I think this adjustment was' moderate ', and both recognized our progress and relaxed the policy slightly, but it was not fully liberalized.”

She also pointed out that the 50 basis point rate cut in September is not the new normal. If inflation continues to decline gradually and the labor market maintains a generally sustainable pace, Daly believes it is a “reasonable choice” to cut interest rates once or twice this year. However, the pace of interest rate cuts will depend on discussions at every meeting.

Daly also reminded investors and observers not to overinterpret recent remarks about “gradual interest rate cuts.” “It's not as important as people think,” she said. It just means we're in an uncertain space that will adjust based on clearer information in the future.”

Despite cutting interest rates by 50 basis points in September, Daly believes that monetary policy is still binding and will continue to put pressure on inflation to ensure that it reaches the 2% target.

Currently, the public is concerned about what level interest rates will eventually be set, but Daly said that the Federal Reserve is still far from making a decision. The Federal Reserve's next interest rate meeting will be held from November 6 to 7. “The truth is, we are still a long way from the final level of interest rates. The next decision we really need to make is how fast we should adjust to that level.”

Daly also pointed out that the US may have a slightly higher neutral interest rate at the end of this economic cycle than when entering the cycle.

She said she continues to evaluate the state of the economy and balance the Federal Reserve's two major goals: price stability and maximum employment. However, she stressed that when evaluating data, we must not rely too much on short-term responses. “Too much reliance on data that may be revised can destabilize the situation and may also lead to poor policy formulation.”

This caution is particularly important now, particularly after the recent hurricanes. Economists expect the upcoming October employment report (to be released on November 1) could reduce up to 100,000 jobs due to the impact of hurricanes Helene and Milton. Despite this, Daly said the employment report was not her focus. She pointed out that when the economy is at an inflection point, it is impossible to rely on “lagging data.”

Daly also said that the current focus is on balancing the Federal Reserve's dual goals, which is different from the Federal Reserve's attempt to reduce inflation and slow the economy in the past two years. “We're not just worried about high inflation. We must ensure that the 2% inflation target is fully met, while ensuring that the labor market meets the criteria for full employment. And this is what people define as a 'soft landing' — ensuring we meet our 2% inflation target while avoiding a recession in the labor market.”

“Continued progress is not inevitable,” she said. “We must be alert, act with caution, continuously assess the state of the economy, and balance our two major goals.”