San Francisco Federal Reserve’s Outlook on Interest Rates

(Reuters) – San Francisco Federal Reserve President Mary Daly stated on Friday that she remains open to a couple of interest rate cuts this year. However, the increasing risks of inflation may require the central bank to exercise caution, especially given the ambiguity surrounding President Donald Trump’s trade policy, which has not significantly disrupted the ongoing robust U.S. economic growth.

> “Continuing to gradually reduce the policy rate with no urgency to react fast is the right thing to do,” she said during an event at the University of California, Berkeley’s Fisher Center for Real Estate & Urban Economics.
> “Ultimately, we made a single promise to the American people – I think you all remember what it was – we are going to restore price stability. That is the critical foundation of all other things we do.”

The Fed has maintained the policy rate between 4.25%-4.50% since December. Policymakers have typically indicated that tariffs are likely to lead to increased inflation and a slowdown in the economy. Many, including Fed Chair Jerome Powell, prefer a wait-and-see approach regarding trade and other policies before making any changes, a sentiment that Daly shares.

This cautious stance on interest rates has provoked frustration from Trump, and on Friday a Trump adviser mentioned that the administration is considering options to remove Powell from his position.

Daly indicated that the Fed could implement more than two rate cuts this year if inflation decreases more rapidly than expected or the labor market weakens. Nonetheless, she expressed concern about inflation risks.

> “Ultimately, the economy is heading to where we wanted it to be, on a sustainable trajectory where we can bring the rate back to neutral,” she stated, estimating a neutral policy rate to be around 3%. “The one challenge, of course, is that inflation remains above our target and the risks to inflation are more elevated than they were a year ago, so the consequence of that is we might have to hold policy tighter for longer than we had thought.”

Daly emphasized that gradual progress on inflation necessitates a restrictive monetary policy approach, but the strong economy allows the Fed time to gain more clarity on the total impact of the new administration’s policies, which encompass tax cuts, spending reductions, deregulation, and immigration restrictions. As of now, she noted that uncertainty surrounding these policies has not hindered economic activity.

> “We haven’t heard a lot about pulling back and hunkering down,” she remarked. “Uncertainty has not stalled out activity … people are ready to engage.”

Moreover, Daly pointed out that recent updates suggest Trump’s tariff policy may not be as expansive or immediate in effect as originally anticipated, potentially lessening its economic impact.