More mixed data would make Daly ‘consider’ a rate cut

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If data remain mixed before the next Federal Open Market Committee meeting, Federal Reserve Bank of San Francisco President Mary C. Daly said a rate cut would be “something to think about.”

“Before May, the economy was in a good place, but now we’re facing a different situation,” Daly told the Forecasters Club of New York. Inflation has been softer than expected and uncertainty has increased.

Three factors — the pace of economic growth, whether inflation stays low, and whether the Fed needs to take out “insurance” to keep the expansion going — will determine her thoughts on monetary policy.

Should the uncertainty remain, she said, it would “make me think and consider whether further accommodation is needed.”

In the past six weeks inflation has been softer, job growth numbers disappointed, headwinds increased as global growth slowed, and financial markets were volatile.

If that persists, or inflation softens further, or the next employment report shows slower job growth, “all together it would be making a better case that some monetary policy accommodation is needed.”

It’s “hard to predict” whether the six weeks of data were transitory. “From May to June various things came up and it’s unclear if they will persist,” Daly said.

As to whether a 50 basis point cut would be on the table, she said, “we have to look at what we are trying to do and what we have in the tool kit. We want to use the right tool and the right magnitude.”

About inflation, Daly said, “I’m uncomfortable with the level and direction of inflation.

“In a low inflation environment, the Fed might have to do more to achieve 2%” inflation," she said. “I am very confident in our ability to fight inflation from above,” but not as confident in fighting it from below.

The inversion in the yield curve is neither “sizeable [in] magnitude or persistence,” she said. "We don’t know the causal mechanism” between inversion and recession, so it makes it difficult to determine if this time is different.

Inversion shows the market is less optimistic than the Fed, but the Fed doesn’t have to “react” just because of inversion, it’s “just one factor” the Fed looks at.

A resolution on trade would reduce the headwinds. “I put a lot of weight on uncertainty as a drag on the economy,” Daly said.

Recession is not “around the corner,” she said, although if these headwinds persist it will slow the economy. “I worry the mood and concerns will dampen growth.” And while economic models show how to deal with some shocks, “uncertainty makes it more difficult.”

Although the fed funds target is 2.25% to 2.5%, below what the Fed typically needs to stimulate the economy in a downturn, Daly said, “we have less space, but if we use it effectively,” it won’t be a problem. Acting early would be key.

Durable goods
Durable goods orders dropped 1.3% in May after a 2.8% decline in April. Excluding transportation, orders rose 0.3% in May after a 0.1% dip in April, the Commerce Department reported Wednesday.

Business spending improved, as orders for non-defense capital goods excluding aircraft grew 0.4% after a 1.0% drop in April.

Economists polled by IFR Markets expected durable goods orders to be flat, orders excluding transportation to rise 0.1% and orders for non-defense capital goods excluding aircraft to also grow 0.1%.

In a speech on Tuesday, Federal Reserve Chair Jerome Powell cited slower business investment as increasing uncertainty and strengthening the case for lowering rates.

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