Fed's Daly says central bank likely on track for more rate cuts

New York: Federal Reserve Bank of San Francisco President Mary Daly said on Tuesday the central bank remains on track for more rate cuts this year as long as data meets expectations, while noting that even with last month’s rate cut, monetary policy is still working to bring inflation pressures down.

The half percentage point cut in the federal funds rate target implemented in September was a “right-sizing” of the stance of interest rate policy, “recognizing the progress we’ve made and loosening the policy reins a bit, but not letting go,” Daly said in a speech given before an event at New York University.

Daly noted that “even with this adjustment, policy remains restrictive, exerting additional downward pressure on inflation to ensure it reaches 2%.”

Daly, who holds a vote on the rate-setting Federal Open Market Committee this year, said if inflation wanes along the lines central bankers expect, "I think one or two [rate cuts] this year would be a reasonable thing” for the central bank to implement.

She also noted that when it comes to the final destination of the Fed's rate-cutting campaign "we're a long way from where it's likely to settle, so the decisions that are really in front of us are ones about how quickly to adjust" to an interest rate that's neutral in its impact on the economy. She also said that neutral rate is likely higher than the low level seen before the coronavirus pandemic struck.

Daly also said the Fed “must stay vigilant and be intentional," working to deliver inflation at the target amid a job market defined by full employment.

Speaking with reporters after her public remarks, Daly declined to say what cadence she'd like the Fed to follow in lowering the funds rate and declined to say whether she thought pausing on changing rates at the November FOMC would be a good idea.

Last month, the Fed lowered its target rate to between 4.75% and 5% in recognition of easing inflation pressures and rising risks to the job market, and penciled in around 50 basis points more worth of cuts into year end. But strong September hiring data showed more labor market vigor than most had expected, in turn calling into question the pace and size of future rate cuts.

Daly also told reporters after her speech that while she's closely watching short-term markets for signals, she does not yet see a case for ending the Fed's ongoing process of shedding bonds it purchased during the pandemic and its immediate aftermath, done to calm markets and provide additional policy stimulus.

"Right now, today, I don’t have any signs this is something that needs to change right away," Daly said of quantitative tightening, or QT.

The Fed has reduced holdings from a peak of $9 trillion in the summer of 2022 to its current level of $7.1 trillion. Some are speculating tighter money market conditions could bring an earlier stop to QT, but Fed officials have been skeptical of that view.

Daly also said in her remarks that “the economy is clearly in a better place,” with inflation pressures down by a lot, while the job market is now on a more sustainable path. She added, “the risks to our goals are now balanced.”

She said the current unemployment rate of 4.1 per cent is around the long-run average and labor market conditions are now close to where they were before the pandemic started. Daly also said the job market “is no longer a major source of inflation pressures.”