San Francisco Fed President Says Strong Labor Shouldn’t Halt Rate Cuts

When speaking about the Federal Reserve, it gets forgotten that it’s not one monolithic entity. Instead, it is a collection of separate cooperating organizations and many people with differing opinions. Those differences can be enlightening and raise questions not only for the institution but the public, including CRE investors.

One example is San Francisco Fed President Mary Daly, who told the New York Times in a recent interview, “I’m very opposed to cutting off expansion out of fear.”

As Goldman Sachs economists have estimated, inflation may already have returned to 2%. They think the Personal Consumption Expenditures price index out of the Commerce Department will show that on its Halloween release — to be exact, a 2.04% year-over-year inflation rate.

“The overall trend over 12, 18 months is clearly that inflation has come down a lot, and the job market has cooled to a level which is around where we think full employment is,” Federal Reserve Bank of Chicago President Austan Goolsbee told CNBC. “We’d like to get both of them to stay in the space where they are right now.”

However, few have publicly discussed what happens if and when inflation returns to 2%. Daly’s concern is the pressure to end rate cuts. The argument for freezing rates is if inflation is low with current interest rates, additional cuts could set off a wave of additional inflation from business expansion and more hiring. It would be similar to what happened in the 1980s when the Fed thought it had stopped even heavier inflation than a year or two ago and began cutting. Inflation roared back.

Instead, Daly points to 2019, when a strong job market and economic activity didn’t set off inflation. It took the pandemic overturning supply chains, thus driving up prices, to do that.

“We should not kill off job growth and good growth as long as it doesn’t produce inflation,” Daly said. “If we could get 2019 again, I’d be all for it — why not/?”

Interestingly, Daly’s fuller take is similar to what Fed Chair Jerome Powell recently said.

Daly told the Times that if the labor market was stronger than expected and inflation “a little bit sticker [than expected],” one rate cut this year might be enough. “If, on the other side of that, the labor market decelerates more quickly, or inflation comes down more quickly, well, then we could make additional adjustments,” she added.

Then consider Powell’s remarks in a Q&A session after a speech at the National Association for Business Economics Annual Meeting in Nashville, Tennessee. “This is not a committee that feels like it’s in a hurry to cut rates quickly,” Powell said. “Ultimately, we will be guided by the incoming data. And if the economy slows more than we expect, then we can cut faster. If it slows less than we expect, we can cut slower.”

Maybe there’s more unity than some are assuming.