Fed's Daly: To prevent excessive tightening, rate cuts may be needed next year
Mary Daly, President of the Federal Reserve Bank of San Francisco, stated that it may be appropriate to lower benchmark interest rates next year due to the improvement in inflation this year. The Fed's goal is to bring the inflation rate down to 2%, but they hope to do so in a gradual manner. She has a similar expectation for considering rate cuts starting in 2024 and expects the Fed to lower rates by 75 basis points next year, bringing the inflation rate to around 2.4%. She believes it is too early to speculate on when the rate cuts will happen and is more focused on the developments in 2023. Daly believes that maintaining stable rates will reduce the possibility of excessive tightening, but still believes that a 75 basis point reduction in benchmark rates would be sufficient to provide restraint.
Zhitong App learned that Mary Daly, President of the Federal Reserve Bank of San Francisco, said on Monday that it may be appropriate for the Federal Reserve to lower benchmark interest rates next year due to improved inflation this year.
Daly stated in an interview that the Federal Reserve must ensure stable prices for people while not taking away job opportunities. She said that the Fed's goal is to bring the inflation rate down to the target of 2%, but hopes to do so "in a gradual way, minimizing disruption to the labor market."
The official pointed out that considering how much inflation has eased this year, it is appropriate for policymakers to consider rate cuts starting in 2024. Her expectations for interest rates and inflation are similar to the median forecast of all 19 Fed policymakers announced last week, which showed that most people expect the Fed to lower the current policy rate target range of 5.25%-5.50% by 75 basis points next year, and the inflation rate will drop to around 2.4% by the end of the year.
However, she said it is too early to speculate on when the rate cut will happen in response to market expectations for aggressive rate cuts. "Right now, what I'm really focused on is the developments in 2023," Daly said.
According to the CME FedWatch Tool, traders expect the most likely range for the federal funds rate at the end of 2024 to be 3.75% to 4.00%, which is 150 basis points lower than the current rate and twice the rate cut predicted by policymakers.
In addition, Daly stated that this number tends to fluctuate significantly when the unemployment rate rises, which is a situation she hopes to avoid. Currently, the US unemployment rate is 3.7%, only slightly higher than the level when the Fed started raising rates in March 2022.
Daly said that as the inflation rate declines, maintaining stable interest rates will increase the real borrowing costs for households and businesses, increasing "the possibility that we could easily become overly tight, and that's what I'm paying attention to."
However, she pointed out that even if the benchmark interest rate is lowered by 75 basis points next year, monetary policy will still be "sufficiently restrictive."