San Francisco Fed President: Inflation data does not bring confidence, high interest rates need to be maintained

According to the financial news app Zhitong Finance, on Monday, Mary Daly, President of the Federal Reserve Bank of San Francisco, believes that the U.S. economy still needs high interest rates to do more work to slow down demand and inflation. She stated that the Federal Reserve is prepared to address the need to boost the weak labor market and sustainably high inflation, but it is currently unclear which scenario is more likely to occur. Daly stated in a speech at the California Club World Affairs Council on Monday that there will be no change in interest rates at the moment. She said, "So far this year, the fluctuations in inflation data have not brought confidence. The recent readings are encouraging, but it is difficult to determine if we are truly on a path to sustainable price stability." Daly is a voting member of the Federal Open Market Committee, the Federal Reserve's decision-making body, and has been leading the San Francisco Fed since 2018. According to the Federal Reserve's preferred measure of inflation - the Personal Consumption Expenditures Price Index (PCE), the annual inflation rate has dropped from a peak of over 7% in 2022 to less than 3% in the fourth quarter of last year. Since then, the index has been stagnant: the PCE price index rose by 2.7% year-on-year in April. The data for May will be released on Friday. Daly attributes the decline in inflation in the second half of 2023 to supply-side factors, including improvements in the supply chain and labor growth. She believes that this year, high interest rates have begun to impact demand, slowing down inflation. She said, "Of course, as demand slows, the labor market is also slowing. However, so far, the rise in unemployment has been mild compared to the decline in inflation." Daly stated that the help from supply-side factors may decrease in the remaining time of 2024. The supply chain has largely recovered from the disruptions of the pandemic period, and the labor participation rate in the United States has almost returned to its previous level. "We must remain open to positive supply developments, but relying more on demand suppression rather than supply improvement may be necessary to bring inflation down to target." She pointed out that further slowing of demand could mean a greater degree of weakness in the labor market. Job growth has been strong so far this year, with a slight increase in the unemployment rate. However, job vacancies have decreased significantly, and future employer tightening policies may be reflected in actual job positions, not just vacancies. Daly said, "At this stage, inflation is not the only risk we face. We need to strike a balance between inflation and full employment to achieve our goals." Since July 2023, the FOMC has maintained the federal funds rate target within the range of 5.25% to 5.50%. The prices in the interest rate futures market on Monday indicate that there is nearly a 70% chance of a quarter-point cut in the target at the committee meeting in September, and the highest likelihood of two rate cuts by the end of 2024