Subtle Changes in the Fed's Attitude
In recent public statements, San Francisco Fed President Daly has expressed a preference for future monetary policy adjustments. She believes that with the labor market gradually slowing down and no persistent upward pressure on prices, the Fed may need to take easing measures sooner and more frequently.
Current Policy Stance May Not Be Sustainable for Long
Although last week's meeting kept the current interest rate range unchanged, Daly made it clear that this does not mean the current strategy will last much longer. She stated that it is necessary to reassess at every future policy meeting whether adjustments need to be initiated. Although she did not explicitly commit to a rate cut in September, she has shown a more proactive stance on policy considerations than before.
Two Rate Cuts May Not Be Enough
Regarding the Fed's forecasted path of "two 25 basis point rate cuts" within the year, Daly believes this is just "one of many possible scenarios." She admits that if the economic weakness persists and is not countered by inflation, the rate cuts may "need to exceed two."
Data-Driven Assessment as a Main Criterion
Daly emphasized in her speech that multiple sets of upcoming economic data will provide key references before the September meeting. She noted that she is particularly concerned about whether the weakening trend in employment-related data will further expand. Current employment growth is noticeably slowing, but she cautions against jumping to conclusions based solely on changes in a single month.
Moderate Response to Inflation
Regarding inflation, Daly believes there is no evidence yet that price increases caused by tariffs will lead to systemic inflationary pressures. She warns that if the Fed reacts slowly to this issue, it might be "too late" by the time it is fully confirmed.
Risk of Continued Policy Mismatch
Daly pointed out that the most important current task is to grasp the policy rhythm and avoid missing a crucial adjustment window by ongoing observation. She describes the current environment as a "crossroads requiring trade-offs," where it's necessary to continue controlling inflation while avoiding excessive suppression of employment.
Declining Employment Quality Deserves Attention
She further noted that in addition to the insufficient number of new jobs, soft indicators such as slowing wage growth and reduced working hours also indicate a gradual decline in employment quality. If these trends continue, the Fed may not be able to remain inactive.
Monetary Policy May Shift Sooner
Daly's statements collectively indicate that the consensus within the Fed on maintaining the current high-interest-rate policy is being shaken by challenging data. As risk factors intensify, the likelihood of policy adjustments in the coming months is increasing, and market participants should prepare for a more flexible policy path.
