Rates Are on Hold This Year, but Cuts Are Still Possible, Says Fed's Daly

Federal Reserve Bank of San Francisco President Mary Daly said the U.S. central bank might need to keep interest rates higher for a longer period than previously expected due to persistent inflation risks. However, she also noted that rate cuts could still happen later in the year if inflation shows signs of sustained moderation.

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Speaking at an event hosted by the University of California, Berkeley, Daly emphasized that inflation pressures remain elevated compared to a year ago. This change in outlook, she explained, could require the Federal Reserve to maintain a tighter monetary stance for an extended period.

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“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 said. “But that doesn’t mean tight forever because, ultimately, inflation is coming down.”

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Despite the more cautious stance, Daly reiterated her support for the Federal Reserve’s March projections, which indicated two possible quarter-point rate cuts in 2025. These reductions, she said, would be appropriate if inflation continues on its current downward trajectory.

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“If inflation does eventually decline, we do have to make gradual reductions in the interest rate, something like what we said in the SEP [Summary of Economic Projections], in order to ensure that we don’t over-tighten the economy,” she added.

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Daly stressed that the Fed has time on its side and doesn't need to act hastily. While she acknowledged that rate adjustments could come gradually, she argued that there's no need to rush those decisions.

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“I could imagine a place where we can adjust the policy rate over time, but we don’t have to be urgent about it,” Daly said. “We have plenty of time, and we’re in a good place to kind of wait this out a bit.”

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The Federal Reserve has kept interest rates unchanged throughout the year in response to inflationary pressures that have proven stickier than expected. The situation has been further complicated by former President Donald Trump’s trade proposals, which include a significant increase in tariffs on imported goods. These policy proposals have introduced additional uncertainty into the economic outlook.

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Most economists anticipate that such higher tariffs could initially slow economic growth while simultaneously pushing prices higher — a combination that could place the Fed in a challenging position.

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Federal Reserve Chair Jerome Powell, along with other policymakers, has said the central bank remains focused on ensuring that any inflation resulting from trade-related price increases doesn’t lead to a more entrenched rise in overall inflation expectations.

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While many Fed officials have expressed concern about the inflationary impact of higher tariffs, Daly appeared more optimistic about how the economy is currently responding. She noted that despite elevated interest rates and external economic pressures, monetary policy remains appropriately restrictive and continues to help contain inflation.

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“We’re in a solid place and, of course, monetary policy remains restrictive to continue to put downward pressure on inflation,” Daly said.

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In her discussions with business leaders, Daly observed that companies are exercising caution. However, she reported that most firms are still moving forward with investment plans and have not been cutting back significantly on spending or employment.

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“So far we haven’t heard a lot about layoffs. We haven’t heard a lot about pulling back and hunkering down,” she said, pointing to a degree of resilience in business sentiment despite current monetary and trade conditions.

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Daly also offered her assessment of the “neutral” interest rate — the rate at which monetary policy neither stimulates nor restricts the economy — after adjusting for inflation. She estimated that figure to be around 1%, which provides a benchmark for evaluating how restrictive current interest rates are.

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Her comments highlight the delicate balancing act the Federal Reserve faces as it tries to navigate inflationary risks while avoiding excessive tightening that could slow the economy too much. Daly’s remarks suggest a cautious but measured approach, with a willingness to adapt if inflation improves, but also a readiness to keep rates elevated if price pressures remain stubborn.

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