Pigeon chirping resumes! Federal Reserve's Daly: Labor market is fragile and may require one or two more rate cuts

The latest statement from Mary Daly, President of the San Francisco Federal Reserve, indicates that she believes one or two more rate cuts may be necessary to address the soft labor market. Currently, workers are in a difficult position as rising prices erode wages, and new job opportunities are scarce.

“On the interest rate front, I think we need to stay open-minded, very open-minded,” Daly said in an interview last Friday. This was her first interview since the Federal Reserve kept interest rates unchanged at the end of last month.

At the end of last month, the Federal Open Market Committee (FOMC) decided to keep the benchmark interest rate unchanged in the 3.50% to 3.75% range with a 10-2 vote, with Fed officials Milan and Waller both advocating for rate cuts.

“I support that decision, but frankly, I think there are reasons to go further and implement more rate cuts,” Daly said. She added that deciding to cut rates “requires a good deal of confidence, really a lot of confidence — confidence that tariffs’ impacts will gradually fade… and that inflation is indeed on a downward trajectory.”

According to the Fed’s preferred measure, U.S. inflation hovered around 3% last year, well above the 2% target. However, many analysts, including some Fed officials, expect commodity inflation to peak around mid-year, with overall inflation easing again.

Daly stated that rate cuts also require “genuine concern that the labor market conditions are more severe than current data suggest.”

The U.S. unemployment rate was 4.4% in December last year. Economists surveyed by the media expect the latest non-farm payroll data to be released next week to show the unemployment rate remaining unchanged in January. Market expectations for January non-farm job growth are centered around 60,000 to 80,000; falling below this range could boost expectations for rate cuts.

Notably, the upcoming non-farm report will also include annual data revisions. Some investment banks believe that U.S. employment in 2025 has been systematically overestimated, with annual employment data potentially being revised downward by 1 million.

Daly said that, despite the apparent balance between stable prices and full employment (the Fed’s two main goals), she sees current vulnerabilities leaning more toward the labor market.

She explained that if companies find that expected demand does not materialize, layoffs could increase in the labor market. However, given that inflation expectations remain stable, she does not believe inflation will heat up significantly.

“Compared to inflation, I am actually more worried about the labor market,” she said.

Daly is also paying attention to another important employment indicator: the number of parents who confide in her about difficulties their children are having finding jobs. This phenomenon has been reflected in recent data, with the unemployment rate among recent college graduates higher than that of the overall workforce.

“This reflects instability in the job market,” she said. “Given the current economic situation I see, I lean toward supporting further rate cuts, but whether it will be one or two is hard to say.”

Federal Reserve Vice Chairman Jefferson stated at another event that there is a possibility of a sudden weakening in the U.S. labor market, but he believes the overall employment situation remains stable and has benefited from the rate cuts implemented by the Fed so far.

(Source: Caixin Global)