Fed’s Daly says rate cuts needed to keep labor market healthy By Reuters

By Ann Saphir

(Reuters) – The Federal Reserve needs to cut interest rates to keep the labor market healthy, but it now depends on incoming economic data to determine how much, San Francisco Fed President Mary Daly said on Wednesday.

“As inflation comes down, we have a rising real interest rate in a slowing economy; that’s a basic recipe for over-tightening,” Daly told Reuters in an interview.

The health of the labor market, she said, must be “supported and protected, and we have to be very careful that if the policy is too tight, you might see a further slowdown in the labor market, and in my view it would not be welcome”.

So far, however, the job market has softened but is still healthy, she said.

Daly and her colleagues are expected to cut interest rates at their next policy meeting on September 17-18. The Fed quickly raised borrowing costs in 2022 and 2023 and kept the policy rate in the 5.25%-5.50% range for more than a year to curb inflation.

Most analysts expect the Fed to hold on to a quarter-point interest rate cut at its September meeting, although analysts are keenly awaiting the US Labor Department’s monthly employment report due on Friday for any sign of further tightening of the labor market that could trigger higher growth. The Fed’s response.

Financial markets added to bets on a half-point rate cut this month on Wednesday after government data showed US job openings in July fell to the lowest level in three and a half years , and the ratio of job openings to job seekers — a metric of labor market tightness — is now below the pre-pandemic average.

For Daly, however, the report showed a job market that is balanced but not weak.

“It’s hard to really find evidence that it even flushes,” she said.

Wages are rising faster than inflation and workers are still finding jobs. And while companies tell Daly they’re being “frugal” about hiring, they’re not “dusting off their layoff books,” she said.

The Fed reserves “aggressive” moves for times when the outlook is certain, she said — for example, the 2020 pandemic shutdowns that triggered the Fed’s decision to cut rates to near zero.

The current outlook is less certain, Daly said, adding that as he talks to people in the communities he visits, they still cite inflation as their top concern.

“We don’t have price stability,” she said. With inflation still above the Fed’s 2 percent target, “we need to continue to put downward pressure on it.”

How much of a rate cut is needed, “We don’t know yet, do we?” Daly said. “We’ve got a labor market report, we’ve got a CPI report, we’ve got all our contact information — I’m in the middle of gathering all that information,” adding that she’ll need to discuss the data with her staff. and her fellow policy makers. “I want more time to do all the work necessary to make the best decision.”

The Fed needs to keep the labor market where it is now with an expectation that it will continue to expand, Daly said, “if people regain some of the losses from the period of high inflation and also if we go. to get to this place and people look back and say, “Okay, we got inflation down, gently, without hurting the economy.” That’s the goal.”