Fed's Mary Daly Says It’s Too Early to Know Necessity or Size of Rate Cut
Fed's Mary Daly Says It’s Too Early to Know Necessity or Size of Rate Cut
(Bloomberg) -- It’s too early to know whether policy makers should cut interest rates and whether such a reduction should be a quarter or half percentage point, Federal Reserve Bank of San Francisco President Mary Daly said Thursday in an interview with Bloomberg Television.
The Fed is widely expected by investors to cut interest rates in July, with some looking for a 50 basis-point move.
“If the data come in that show significant weakening, that would call for different actions than if the data come in and say that we are just getting headwinds and we’re slowing,” Daly said in an interview with Bloomberg’s Michael McKee. “It is too early, from my perspective, to know whether we should use the tool at all and what magnitude of the tool we should apply.”
U.S. central bankers left the benchmark lending rate unchanged at their June 18-19 meeting, while pivoting toward a rate cut. The central bank said in its statement that “uncertainties’’ about the outlook have increased and that it will “closely monitor’’ incoming information.
In addition, the Fed has been whittling down the size of its balance sheet since late 2017. Officials said in March they would halt the process at the end of September, and have opted for a strategy where banks will have ample reserves, a contrast to the period before the financial crisis when the central bank operated with a tight reserve market.
Distinct Tool
Daly said the federal funds rate is a distinct instrument from the balance sheet.
“The balance sheet and funds rate issues are still open for discussion,” she said.
Continuing to run down the balance sheet “in my judgment doesn’t counteract or contradict policy,” she added. “This has been well-telegraphed, well-announced, so many of the effects of the balance-sheet runoff to ample reserves is already in the markets.”
Daly is a non-voting member of the Federal Open Market Committee this year. Fed policy makers are next scheduled to meet July 30-31.
Fed Chairman Jerome Powell, in his press conference June 19, explained that the committee was becoming less optimistic that inflation would soon move back to the 2% target. Fed officials revised their forecast lower to just 1.5% this year, and 1.9% for 2020.
“We are well aware that inflation weakness that persists even in a healthy economy could precipitate a difficult-to-arrest downward drift in longer-run inflation expectations,” Powell said in his press conference.
St. Louis Fed President James Bullard, a voting member who dissented in favor of a quarter-point cut this month, also cited too-low inflation as a reason why he favors a reduction of borrowing costs now.
For her part, Daly said she is “not a proponent” of the idea that inflation expectations have drifted below 2% in a sustained way. “I do see indications that it is getting a little untethered,” she said, adding that she supports putting weight on this risk as the Fed considers its policy.
--With assistance from Rich Miller.
To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net;Michael McKee in New York at mmckee@bloomberg.net
To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Scott Lanman, Vince Golle
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