‘Hard to imagine’ anything could derail September rate cut, Fed official says
San Francisco Federal Reserve Bank President Mary Daly believes an interest rate cut in September is a done deal, echoing recent comments by Chairman Jerome Powell.
“The time to adjust policy is upon us,” Daly told Bloomberg TV in an interview.
Although Daly declined to comment on the exact path of monetary policy, she said the most likely outcome is a standard 0.25% rate cut at the upcoming Federal Open Market Committee (FOMC) meeting.
When asked if there’s anything that could derail the Fed’s plans, Daly said it “would be hard to imagine at this point.”
Daly was one of the 12 FOMC members to vote on interest rates last month. According to an official account of that meeting, policymakers strongly considered a July rate cut before ultimately deciding against it.
Daly told Bloomberg that the time for waiting is over. “We don’t want to get ourselves in a situation where we’re keeping policy highly restrictive into a slowing economy,” she explained.
Policymakers are approaching rate cuts with a greater sense of urgency after multiple reports showed the labor market is weakening more than expected.
After being hyper-fixated on inflation for the past two years, the central bank is shifting its attention to the other side of its mandate: full employment.
Playing catch up
When the Fed let inflation spiral out of control in 2021 and 2022, it had to play catch up by raising interest rates aggressively over the next year. Now, policymakers are shifting their focus again as the labor market situation deteriorates.
Not only is the Fed dealing with a rapid rise in unemployment, which has triggered the dreaded Sahm Rule recession indicator, but the pace of job growth has been much weaker than initially reported.
As Creditnews reported, the Bureau of Labor Statistics overcounted job growth by a staggering 818,000 positions between March 2023 and March 2024. In other words, the Fed continued to hike interest rates in 2023 on the misguided belief that the job market was stronger than it was.
The Fed must now determine whether the economy and labor market will moderate at current levels or continue weakening.
This decision could determine how quickly policymakers adjust interest rates in the coming months. If economists like David Rosenberg are correct, rate cuts in increments of 0.5% shouldn’t be ruled out.
“We’re definitely cooling, but are we cooling to a point where we’re going to level out, or is this just a pit stop to a stronger cooldown,” Nela Richardson, the ADP Research Institute’s chief economist, told Reuters.
Ian Shepherdson, Pantheon Macroeconomics’ chief economist, said the central bank is clearly getting worried about the labor market situation. He said the shift in Chairman Powell’s tone since June has been “startling,” signaling a growing urgency to cut rates.