San Francisco Federal Reserve President Mary Daly said Friday that she believes the central bank may need to deliver one or two additional interest rate cuts to respond to emerging weakness in the U.S. labor market.
In an interview, Daly said, "I think we have to keep an open mind, a very open mind" on rates. She expressed support for the Fed's recent decision to keep the policy rate at 3.50%-3.75%, but also observed that "you could make a case for going ahead and taking a little more off."
Daly highlighted specific labor market concerns that are shaping her stance. She said workers are on a "knife's edge" as elevated prices have eaten into wage gains and job opportunities appear constrained for some groups. She singled out the struggles of recent college graduates to find employment as a worrying sign of labor-market softness.
On the relative balance of risks, Daly said, "I'm a little more worried about the labor market than I am about inflation," while noting that risks to price stability and maximum employment look, at present, "relatively balanced." Her view, she added, is that vulnerabilities tilt toward labor market concerns.
For additional rate cuts to proceed, Daly said policymakers would need to be confident that inflation is on a sustained downward trajectory and that the labor market problems are more pronounced than currently indicated by headline data. The U.S. unemployment rate was 4.4% in December.
Daly also cautioned that a labor market characterized by low hiring could quickly move toward a period of increased layoffs if businesses do not see expected demand materialize, a transition she described as a shift from a "low-firing" to a "some-firing" environment. Such a development, she warned, could prompt Federal Reserve action.
Although Daly does not have a vote on the Federal Open Market Committee this year, she attends policy meetings and said her comments reflect positions she brings into those discussions. Her remarks provide insight into how some Fed officials are weighing labor-market vulnerabilities against inflation trajectories as they consider the path of monetary policy.
Key points
- Mary Daly favors keeping policy options open for one or two additional rate cuts if labor-market weakness intensifies.
- She supports the Fed's decision to hold the federal funds rate at 3.50%-3.75% but acknowledged a case for further easing.
- Primary concerns center on wage erosion and limited job opportunities for recent graduates, with unemployment at 4.4% in December.
Risks and uncertainties
- Labor market deterioration: A move from "low-firing" to "some-firing" could increase unemployment and pressure consumer-facing sectors and credit portfolios.
- Inflation path uncertainty: Policymakers require confidence that inflation is declining before cutting rates, leaving timing dependent on price trends.