The Fed will most likely cut rates by a quarter of a percentage point next month, Reuters’ Daly says

By Ann Saphir

(Reuters) – San Francisco Federal Reserve President Mary Daly said on Monday that “the time has come” to cut interest rates, possibly starting with a quarter-percentage point cut in borrowing costs. Asked if there was anything that could derail a rate cut at the US central bank’s September 17-18 policy meeting, Daly told Bloomberg TV that “it would be hard to imagine at this point.”

She said the “most likely” path forward is for inflation to continue to gradually decline and for the labor market to add jobs at a “steady, sustainable” pace — and if that projection comes to pass, ” policy adjustment to the normal, normal cadence’. seems reasonable.”

The Fed typically adjusts rates in quarter-percentage-point increments, though it has gone through four consecutive 75-basis-point hikes in 2022 and continued to tighten policy in 2023 in response to a pick-up in inflation.

“We haven’t seen any deterioration in the labor market yet,” she said, but “if we were to see a deterioration or any signs of weakness, then it would be appropriate to be more aggressive in making sure we don’t see that. “

Using words that echoed those of Fed Chairman Jerome Powell at a conference last week in Jackson Hole, Wyoming, she said, “the direction of change has gone down. And the time to adapt is now in my opinion”.

The Fed kept its policy rate in the range of 5.25%-5.50% from July 2023.

Powell told the global meeting of central bankers in Jackson Hole last week that “the time has come” to start cutting interest rates, given the progress made in reducing inflation and the cooling of the labor market.

By the gauge preferred by the Fed, the year-on-year increase in the personal price index of consumption expenditures, inflation increased by 2.5% in July; the Fed’s target is 2%. In 2022, it peaked at around 7%.

The U.S. unemployment rate in July was 4.3%, up nearly a percentage point from a year ago, but still low by historical standards.

“We don’t want to end up in a situation where we’re maintaining extremely restrictive policy in a slowing economy,” Daly said. “Remember, every time inflation goes down, policy gets tighter. And I think that’s a recipe, if you will, for over-tightening and hurting the labor market and growth.”