According to San Francisco Fed President Daly, the Fed needs to cut interest rates to maintain a healthy labor market, but the specific amount of rate cut will depend on the upcoming economic data.

Daly said in an interview, "As inflation falls, we face the situation of rising real interest rates in the context of an economic slowdown. This is the basic formula for over-tightening."

She said that the health of the labor market must be "maintained and protected, and we must be very careful that if the policy is too tight, it may lead to additional slowdown in the labor market, which I believe would be unwelcome."

However, so far, although the labor market has softened somewhat, it remains healthy.

Daly and her colleagues generally expect a rate cut at the policy meeting on September 17-18. The Fed rapidly raised borrowing costs in 2022 and 2023 and kept the policy rate in the range of 5.25% to 5.50% for over a year to curb inflation.

Most analysts expect the Fed to stick to a 25-basis-point rate cut at the September meeting, although analysts eagerly await the release of the U.S. Labor Department's August monthly employment report on Friday to look for any signs of labor market slowdown that could trigger a larger reaction from the Fed.

On Wednesday, financial markets increased their bets on a 50-basis-point rate cut this month after data showed that U.S. job openings in July fell to the lowest level in three and a half years, and the ratio of job openings to job seekers (an indicator of labor market tightness) is now below pre-pandemic levels.

However, for Daly, this report indicates a balanced rather than weak labor market. She said, "It's even hard to find evidence that it's deteriorating."

Wage growth is faster than inflation, and workers are still able to find jobs. While companies told Daly that they were becoming "frugal" in hiring, Daly said that companies did not "pull out the layoff manual."

Daly said that the Fed would reserve "aggressive" actions for when the outlook is clear - such as the COVID-19 lockdown in 2020, which prompted the Fed to lower interest rates close to zero.

Daly said that the current outlook is less certain, adding that when she talks to people in the community she visited, they still list inflation as their top concern.

She said, "We don't have price stability." Due to inflation still being above the Fed's 2% target, "we have to continue to apply downward pressure (on inflation)."

As for how much interest rates need to be lowered, Daly said, "We don't know yet, right? We will see a labor market report and a CPI report before the September meeting, we have all the relevant information - I am collecting all this information."

She added that she also needs to discuss these data with her staff and colleagues. "I hope to have more time to do all the work that needs to be done in order to make the best decisions."

Daly said that the Fed needs to maintain the labor market roughly as it is and expects it to continue to expand. "If we can reach such a point - when people look back and say, 'Well, we moderately reduced inflation without disrupting the economy.' - that's the goal."

Editor/Rocky