San Francisco Fed President Signals Imminent Quarter Percentage Point Rate Cut

San Francisco Federal Reserve President Mary Daly said on Monday that the time has come to reduce interest rates, with the first cut likely to be a quarter-percentage point decrease.

In an interview with Bloomberg TV, Daly said it would be difficult to envision a scenario that would prevent the U.S. central bank from lowering rates during its upcoming policy meeting on September 17-18.

Daly added that the "most likely" outlook involves continued gradual declines in inflation alongside steady and sustainable job growth.

Should this projection hold, she believes that adjusting monetary policy at the Fed's usual pace of quarter-percentage-point increments would be appropriate.

The Fed, which had implemented a series of aggressive rate hikes—including four consecutive 75-basis-point increases in 2022—has kept its policy rate steady in the 5.25%-5.50% range since July 2023 as it tackled the inflation surge.

Daly said that while the labor market has not yet shown signs of deterioration, the Fed must remain vigilant.

She suggested that any emerging weaknesses would justify a more aggressive rate-cutting approach to prevent economic harm.

Echoing sentiments shared by Fed Chair Jerome Powell during last week's Jackson Hole conference, Daly said that "the direction of change is down," and asserted that "the time to adjust is now."

Powell had similarly signaled that the progress made in reducing inflation and the cooling labor market justified the start of rate cuts.

Inflation, as measured by the Fed's preferred personal consumption expenditures (PCE) price index, rose 2.5% year-over-year in July, down significantly from its 2022 peak of around 7% but still above the Fed's 2% target.

Meanwhile, the U.S. unemployment rate stood at 4.3% in July, nearly a full percentage point higher than a year earlier but still low by historical standards.

Daly also cautioned against maintaining overly restrictive policies in a slowing economy, warning that continued high interest rates when inflation falls could potentially harm both the labor market and overall economic growth.

"We don't want to get ourselves into a situation where we're keeping policy highly restrictive into a slowing economy," Daly said.

"Remember, every time inflation comes down, the policy gets more restrictive. And I think that's a recipe, if you will, for overtightening and injuring the labor market and growth."