Ahead of the Jackson Hole Meeting... Fed Daily Advocates "Gradual Interest Rate Cuts"

Just days before the 'Jackson Hole Meeting,' which provides clues about the direction of U.S. monetary policy, a Federal Reserve (Fed) official stated that it is now time to begin 'gradual interest rate cuts.'

[Image source=Reuters Yonhap News]

Mary Daly, President of the Federal Reserve Bank of San Francisco, said in an interview with the Financial Times (FT) released on the 18th (local time), "It is time to consider adjusting the U.S. borrowing cost (benchmark interest rate), currently at 5.25-5.5%."

As a voting member of this year's Federal Open Market Committee (FOMC), Daly assessed through recent economic indicators that there is "greater confidence" that inflation is increasingly under control. The July Consumer Price Index (CPI) and Producer Price Index (PPI) released last week showed a slower pace than market expectations.

However, President Daly emphasized a 'gradual' approach to the monetary policy shift. She stated, "The labor market is slowing down but is not weak," dismissing calls for a so-called 'big cut' (a 0.5 percentage point cut at once) that had been raised by some. Regarding recession concerns that spread in the market earlier this month, she also judged that "(the U.S. economy) was not in an emergency situation."

Daly expressed, "Gradualism is neither weak, slow, nor behind the curve," adding, "It is simply cautious." She explained that to perfectly achieve the Fed's price stability goal, the constraints of monetary policy must be eased gradually?not too early, nor too late.

In particular, she warned, "We do not want to tighten excessively," noting, "This could lead to undesired outcomes, causing instability and turbulence in both prices and the labor market." FT analyzed that this statement aligns with the warning from Raphael Bostic, President of the Federal Reserve Bank of Atlanta, who cautioned that delaying rate cuts for too long carries risks. Additionally, Daly diagnosed that regarding the labor market, companies are responding by reducing discretionary spending rather than relying on layoffs.

Daly's interview drew attention as it was released just days before the Jackson Hole Economic Policy Symposium, where central bank governors, finance ministers, and economists from various countries gather. The current market focus is on the keynote speech by Fed Chair Jerome Powell scheduled for the morning of the 23rd. It is expected that hints about the size of the Fed's September rate cut and the pace of future cuts will be revealed at this event.

According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds (FF) rate futures market is currently pricing in more than a 75% chance that the Fed will cut rates by 0.25 percentage points in September. Earlier this month, following an employment shock and recession fears, the probability of a big cut had surged to the 80% range but has since fallen to around 24% as economic indicators supporting a soft landing, such as CPI and retail sales, have been released.

However, since cautious remarks are coming from Fed officials, the size of the September rate cut is expected to become clearer after reviewing the August employment report, which will be released on the 6th of the same month. The remaining FOMC meetings this year are scheduled for September, November, and December.

This content was produced with the assistance of AI translation services.