Fed's Daly Signals Flexibility on Rate Cuts, Emphasizes Soft Landing Commitment

San Francisco Federal Reserve president Mary Daly has provided insights into the central bank's potential path for interest rate adjustments in the coming year. Daly's comments suggest a flexible approach, with the possibility of one or two more rate cuts in 2023 if economic conditions cooperate, while also acknowledging the potential for fewer cuts if inflation and the job market prove more stubborn.

Navigating the Delicate Balance of Monetary Policy

Balancing Inflation and Employment Mandates

Daly emphasized the Fed's resolute commitment to achieving a "soft landing" for the economy, where inflation is brought down without causing a recession. She acknowledged that the "work to achieve a soft landing is not fully done," but expressed confidence in the central bank's ability to adjust interest rates to match the economic conditions.The Fed's dual mandate of maintaining price stability and maximum employment is a crucial consideration in Daly's assessment. She noted that adjusting interest rates is "crucial" to prevent the mistake of over-tightening and ensure the central bank is supporting both of its goals.

Flexibility in the Face of Evolving Conditions

Daly's comments suggest a flexible approach to the Fed's rate-cutting cycle, which began in September with a 50-basis point reduction. She described this adjustment as "right-sizing," indicating the central bank had been patiently waiting for inflation to come down and now wants to ensure monetary policy is aligned with the current state of the economy.The Fed official acknowledged that the direction of change is "down," but the pace of future rate cuts remains dependent on how inflation and the job market evolve. Daly stated that if inflation proves to be "stickier than expected" and the labor market doesn't settle at a sustainable level, fewer cuts may be possible.

Monitoring Economic Indicators

Daly's assessment of the economic landscape is nuanced, taking into account various data points. She noted that the latest reading on inflation showed prices warming up in September, as measured by the Consumer Price Index, which has caused some on Wall Street to question whether inflation is heating back up and if the Fed could slow or pause its new rate-cutting cycle.However, Daly also pointed to the September jobs report, which was stronger than expected, as a factor that could influence the Fed's decision-making. She emphasized that the labor market has largely normalized and is no longer a major source of inflationary pressures, suggesting the central bank may have more flexibility in its approach to rate adjustments.

Commitment to the Soft Landing

Daly's comments echo the sentiments expressed by Fed Chair Jay Powell, who has emphasized the central bank's intention to use its tools to keep the economy in a solid shape and avoid a recession. Daly reiterated this commitment, stating that the Fed is "resolute" in its quest to achieve a soft landing and bring down inflation without causing significant economic disruption.The San Francisco Fed president's remarks underscore the delicate balance the central bank must strike as it navigates the complex economic landscape. By maintaining a flexible approach and closely monitoring key indicators, the Fed aims to steer the economy towards a sustainable path of growth and price stability.