Looking forward to the Fed's "aggressive" rate cut? Daly: Wait for the outlook to be clear before commenting!

San Francisco Fed President Daly said on Wednesday that the Fed needs to cut interest rates to maintain the health of the labor market, but the specific amount of the rate cut will depend on the upcoming economic data.

Daly said in an interview, "With inflation falling, we are facing a situation where real interest rates are rising against the backdrop of an economic slowdown. This is the basic recipe for over-tightening."

She said, "The health of the labor market must be maintained and protected. We must be very careful. If the policy is too tight, it may lead to additional slowing in the labor market, which I think would be unwelcome."

However, so far, although the labor market has softened somewhat, it remains healthy.

Daly and her colleagues generally expect a rate cut at the policy meeting on September 17-18. The Fed rapidly raised borrowing costs in 2022 and 2023, keeping the policy rate in the range of 5.25% to 5.50% for over a year to curb inflation.

Most analysts expect the Fed to stick to a 25 basis point rate cut at the September meeting, although analysts eagerly await the release of the U.S. Labor Department's August monthly employment report on Friday to look for any signs of labor market slowdown that could trigger a larger Fed response.

On Wednesday, after data showed U.S. job openings in July fell to the lowest level in three and a half years, financial markets increased bets on a 50 basis point rate cut this month, pushing the job openings-to-applicants ratio (a measure of labor market tightness) below pre-pandemic levels.

However, for Daly, the report shows a balanced rather than weak labor market. She said, "It's even hard to find evidence that it's deteriorating."

Wage growth is outpacing inflation, and workers are still finding jobs. While companies tell Daly they are becoming "more frugal" in hiring, Daly said companies are not "dusting off the layoff manual."

Daly said the Fed will reserve "aggressive" actions for when the outlook is clear—such as the 2020 pandemic lockdown, which led the Fed to cut rates to near zero.

Daly said the current outlook is not so certain, adding that when she talks to people in the communities she visits, they still list inflation as a top concern.

She said, "We don't have price stability," and as inflation remains above the Fed's 2% target, "we need to continue to put downward pressure (on inflation)."

As for how much of a rate cut is needed, Daly said, "We don't know yet, right? We will see a labor market report and a CPI report before the September action, we have all the relevant information—I am collecting all this information."

She added that she also needs to discuss these data with her staff and decision-making colleagues. "I hope to have more time to do all the work that needs to be done to make the best decision."

Daly said the Fed needs to maintain the current state of the labor market and hopes it will continue to expand, "If we can reach a stage where people look back and say, 'Well, we moderately reduced inflation without damaging the economy.' '—This is our goal.'