(Bloomberg) -- Federal Reserve Bank of San Francisco President Mary Daly said the US central bank must stay vigilant as inflation declines and the labor market cools, though she expressed optimism that officials could keep the current economic expansion on track.
Daly said workers are benefiting from a strong labor market that has drawn more people into the workforce and narrowed earnings gaps, as in past extended periods of growth.
“We’ve already seen some of the same patterns play out in our current expansion. Labor force participation for prime-age workers has reached new highs,” Daly said Tuesday at an event in New York organized by the NYU Stern School of Business. “Compared to recent history, the current expansion is still relatively young.”
Fed officials lowered their benchmark rate by a half percentage point last month, a move policymakers said was meant to protect the labor market. Officials also projected the central bank would reduce borrowing costs by another half point over the remainder of 2024, according to the median of estimates released in September.
Data released since the meeting showed hiring last month was more robust than expected and underlying inflation rose more than forecast, prompting several Fed officials to say they favored a more gradual approach to future cuts.
Daly said Tuesday the labor market was close to pre-pandemic levels and was no longer a source of major inflationary pressures. She also said the Fed’s inflation and employment goals are now balanced, adding officials must keep working to protect the strength of the labor market and bring inflation to their 2% target.
“We must stay vigilant and be intentional, continually assessing the economy and balancing both of our mandated objectives: fully delivering on 2% inflation while ensuring that the labor market remains in line with full employment,” she said.
Daly reiterated that last month’s rate cut was a “recalibration” of policy as inflation cools, emphasizing that rates are still restrictive. She said last week she thought the central bank would likely make one or two more quarter-point rate reductions this year.
In a moderated discussion with Bloomberg TV’s Lisa Abramowicz after her speech, Daly repeated her view that it’s likely the neutral rate, which neither slows nor stimulates the economy, has risen. But she said current rates are still a “long way” above that level.
“People want to know, where will the rate settle?” Daly said. “But the truth is, we’re a long way from where it’s likely to settle.”
Daly said she would be keeping an eye on the data to determine how quickly to reduce borrowing costs, but reiterated that one or two more rate cuts are likely this year.
Speaking with reporters afterward, the San Francisco Fed chief said firms are telling the central bank that they are having a harder time raising prices charged to consumers as growth in spending slows.
“This is not an environment where firms are looking to raise prices,” Daly said. “They’re looking to grow, but they are not looking to raise prices.”
(Updates with additional Daly comments from 11th paragraph.)
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