After a period of silence, calls for interest rate cuts within the Federal Reserve have resurfaced. San Francisco Fed President Mary Daly recently stated that she supports a rate cut next month because she believes a sudden deterioration in the job market is more likely and more difficult to control than a sharp rise in inflation.
It is clear that she now believes that preventing a sudden collapse of the labor market is more urgent than guarding against the risk of renewed inflation.
Daly does not have a vote this year but is a voting member of the FOMC in 2027. Nevertheless, her views are still worth paying close attention to because she is largely in line with Federal Reserve Chairman Powell on monetary policy and rarely expresses dissenting opinions.
Analysts believe that the interest rate setting committee will be divided on whether to cut interest rates or hold them steady at its meeting on December 9-10, and Powell may play a key role in resolving these differences.
In a recent interview, Daly expressed concern about the "non-linear" shift in the labor market. In economics, non-linear change refers to a phenomenon where things gradually deteriorate, but once a threshold is crossed, they collapse rapidly like a cliff.
"The labor market is already fragile enough and faces the risk of a sudden deterioration. It's hard to believe the Federal Reserve can..." "It's enough to stay ahead of the pace of changes in the labor market," she added. "That's enough to show how volatile the current job market is."
The U.S. job market is currently in a state of equilibrium characterized by "low hiring and low layoffs." However, Daly believes this balance is highly likely to be disrupted in a negative direction. She warns, "If companies start reducing hiring because of declining output, the situation could get out of control."
In contrast, concerns about inflation appear relatively mild. While some worry that the Trump administration's tariff policies will drive up prices, Daly stated, "The price pressures from tariffs are not as significant as initially anticipated," downplaying the risk of a sharp rise in inflation. Her logic is that efforts to curb prices should not inadvertently lead to job losses.
Daly emphasized that she still believes the Federal Reserve can bring inflation back to its 2% target without pushing up unemployment, and that failure to do so would mean policy failure.
Coincidentally, Federal Reserve Governor Waller also adopted a dovish stance on Monday, stating that he advocates for a rate cut in December, but subsequent policy paths should be implemented on a meeting-by-meeting basis.
"As far as our dual mandate is concerned, my main concern is the labor market, so I'm advocating for a rate cut at the next meeting. You might see a more meeting-by-meeting approach starting in January," he said.
Of course, divisions remain within the Federal Reserve. Officials who support holding rates steady worry that if the economy overheats again next year, cutting rates too quickly would deplete their policy tools.
In response, Daly countered, " Even if we have to raise rates again next year, we should not hesitate to cut rates now. We cannot let future uncertainties tie our hands and prevent us from taking the necessary actions now."
Regarding the unusual divisions within the Federal Reserve, Daly stated, "This is not a dysfunction, but a natural reflection of uncertainty. If everyone agrees, that's essentially groupthink."
(Article source: CLS)
