Fed Officials Hint At Fall Rate Cut As Inflation Eases

Federal Reserve Bank of San Francisco President Mary Daly suggested that a reduction in interest rates could be appropriate in the fall. This statement comes after Federal Reserve Governor Christopher Waller indicated that the central bank could lower interest rates as early as July. Waller's comments were made during an interview, where he emphasized that economic data show GDP growth and inflation are close to the central bank’s targets. He also noted that the Fed’s benchmark rate is estimated to be 1.25 to 1.5 percentage points above the neutral level, suggesting room for a rate cut. Waller added that the central bank could pause rate cuts if necessary due to unexpected events, such as geopolitical crises.

Daly's remarks, made during an Oakland Rotary meeting, align with Waller's sentiment, indicating a potential shift in the Fed's stance on interest rates. The Fed has kept interest rates on hold for the fourth consecutive policy meeting, with officials preparing for the economic impact of recent tariffs. Fed Chair Jerome Powell has stated that the Fed is monitoring the situation closely before making any decisions on rate cuts. The median projection from Fed policymakers suggests two rate cuts by the end of 2025, although there is a split among officials, with seven policymakers expecting no cuts this year.

Daly said that the US economy is currently in “good shape” and monetary policy is “balanced”. She noted that the impact of the customs duties on inflation, which have recently been on the agenda, does not seem to be as serious as first announced, and that the continuous decline in inflation is also a positive development. “The economic fundamentals are moving toward the possibility of a rate cut,” Daly said, but she added that a rate cut could be more appropriate in the fall unless there is significant weakening in the labor market.

The FED member also stated that caution should be exercised regarding the future course of customs duties, saying, “Other potential customs duty measures may not have as great an impact on inflation as is thought.” However, she added that it was unclear to what extent these measures would be reflected on consumers. The new FED economic forecasts released this week indicate that growth will slow and inflation will increase slightly. However, FED officials predict that interest rates will be cut this year. This shows that they accept that customs duties will put pressure on prices, but they think this effect will not last long.

However, there are striking differences of opinion within the FED. Seven of the 19 officials argue that no interest rate cuts should be made this year, while eight predict two interest rate cuts. This view coincides with investors’ expectations of two 25 basis point rate cuts in September and December. Two officials expect one, and two officials expect three. The discussion around interest rate cuts has been influenced by President Trump's calls for lower rates to reduce government debt servicing costs. However, Waller clarified that lowering rates to benefit the federal government is not part of the Fed's mandate. The central bank's primary focus remains on achieving its economic targets, including stable inflation and maximum employment.

Daly's comments, along with Waller's earlier statements, indicate a growing consensus within the Fed that a rate cut could be on the horizon. The market has already priced in a 15% chance of a July cut, reflecting the anticipation of a potential policy change. As the Fed continues to monitor economic data and global events, the likelihood of a rate cut in the fall becomes more apparent, with officials prepared to adjust their policies as needed.