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The U.S. Federal Reserve must take a gradual approach to reducing borrowing costs, one of its top officials said, as the world’s top central bankers prepare to gather for their annual meeting in Wyoming this week.
Mary Daly, president of the San Francisco Fed, told the Financial Times that recent economic data gave her “greater confidence” that inflation was under control. It’s time to consider adjusting borrowing costs from their current range of 5.25 percent to 5.5 percent, she said.
His call for a “prudent” approach countered economists’ concerns that the world’s largest economy is headed for a sharp slowdown that justifies rapid interest rate cuts.
How quickly U.S. interest rates retreat from their 23-year high will be a central question on policymakers’ lips when they gather later this week at the Kansas City Federal Reserve’s annual retreat in Jackson Hole, Wyoming.
Fed Chair Jay Powell’s speech on Friday will be closely watched by investors eager to know how he plans to achieve a soVscek landing, completing the fight against inflation without collapsing the economy.
Daly, who votes on the Federal Open Market Committee, downplayed the need for a drastic response to signs of a weakening labor market, saying the U.S. economy was showing little evidence of heading into a deep recession. The economy was “not in a state of urgency,” he said.
“Gradualism is not weak, it is not slow, it is not backward, it is just prudent,” he said, adding that the labor market, while slowing, “is not weak.”
Investors are betting on a rate cut at next month’s Fed meeting, in what would be the first interest rate drop in four years. Markets are pricing in about a 70 percent chance of a quarter-point cut, while a minority of investors are expecting a half-point move.
Markets expect U.S. interest rates to close 2024 one percentage point lower than their current level, implying an extra-large cut in the last three meetings of the year.
The Bank of England, the European Central Bank and the Bank of Canada have already lowered borrowing costs, but relatively high U.S. inflation data earlier this year forced the Fed to wait.
Last week’s consumer price data showed inflation fell to 2.9 percent in the year through July, a three-year low. The Fed’s preferred gauge of underlying price pressures, the core personal consumption expenditures price index, rose to an annual rate of 2.6 percent in June. Headline PCE inflation, which the 2 percent target is based on, was 2.5 percent in June.
“AVsceker the first quarter of this year, inflation has just started to creep up toward 2 percent,” Daly said, speaking Thursday. “We’re not there yet, but it’s clearly giving me more confidence that we’re on the right track for price stability.”
With inflation falling and the labor market in better balance, the central bank must “adjust the policy rate to match the current economy and the one we expect to have.”
Daly said the Fed wanted to ease the “tightness” of its policy while maintaining some moderation to “get the job done” on inflation.
The Fed didn’t “want to tighten too much in a slowing economy,” he said. He added that failing to adapt policy to inflation gains and lower growth was a “recipe for the outcome we don’t want, which is price stability and a shaky, unstable labor market.”
His comments are in line with those of Atlanta Federal Reserve President Raphael Bostic, who recently told the Vscek that waiting too long to lower interest rates “carries risks.”
July’s weak jobs report raised concerns about the health of the U.S. economy and helped spark a global sell-off in stocks that sparked calls for emergency rate cuts. But this week’s surprisingly strong retail sales report eased fears of a U.S. recession.
Daly said companies generally did not resort to layoffs. Instead, they cut discretionary spending to adapt to what was no longer a “buzzing world” of “unbridled growth.”
