The San Francisco Fed president's case for more rate cuts

San Francisco Federal Reserve president Mary Daly sees good reason for the Fed to move forward with more interest rate cuts in the months ahead, which she believes will shield workers from "unnecessary hardship."Why it matters: With the economy experiencing an unusual combination of robust GDP growth, weak job creation and elevated inflation, Fed officials face a delicate balancing act in deciding the path of interest rate policy.Daly makes the case that getting rates closer to a level where they're doing less to slow growth is the most sensible course, given risks of continued weakening in the job market.What they're saying: "For me, relaxing the policy rate to make sure it continues to be modestly restrictive — but not so restrictive that it unnecessarily disrupts the labor market — would be the path of policy," Daly, a trained labor economist, tells Axios. "We have enough room to do some cuts and still have a modestly restrictive interest rates."The big picture: "It's not that we've already fallen off a cliff," Daly says, referring to the health of the labor market, where hiring has slowed to a crawl but the unemployment rate has held at a historically low level. "I don't want to hit the point where there would be a precipitous increase in unemployment."What to watch: Daly points to the potential downside risk to the labor market as suggested by the Beveridge Curve, which captures the relationship between vacancies and unemployment. She says the curve suggests the economy might be at a tipping point where an increase in joblessness might soon follow.Between the lines: It makes for an unusual economic backdrop, with solid growth that might not typically warrant rate cuts alongside weak employment that typically does.But Daly says that the Fed's mandate is very clear: "price stability and full employment — growth isn't in there.""Think of the jobless recoveries we had: As long as inflation wasn't rising, monetary policy was accommodative and supportive of continued growth in the labor market," she notes."We weren't saying, 'Oh, growth is good, so we're fine.'"The intrigue: Until September, the Fed had been reluctant to cut interest rates as it waited out uncertainty about tariff policy that risked reigniting inflation."If you look at underlying inflation — especially if you think the tariffs are a one-time event and it takes time for the effects to come through — then you would not want to hold on so tight that you injure the labor market," Daly says. "You don't gain much for that."Data: Bureau of Economic Analysis; Chart: Axios VisualsSo what about inflation? Daly says it looks like tariff-related price increases won't result in a prolonged inflation uptick, which helps support the case for further rate cuts."I'm more optimistic that this is a one-off, and that we can support the labor market and still bring inflation down to 2% over time," Daly says.Zoom in: She, and most Fed policymakers, appear more sanguine about the risk of ongoing inflation than they were when large-scale tariffs were first announced in the spring. She mentions three factors that support that position:Magnitude: "The effective tariff rate is higher than we had before, but it's not totally being passed on to the customer."Scope of tariffs: "The breadth of potential products subject to tariffs has been scoped down because of the tariff negotiations."Containment: "If a goods price goes up, do service providers say, 'I'm going to do opportunistic price increases'? We just haven't seen that — and my guess is that's really because the economy is slower."Flashback: Daly acknowledges the caution around calling an inflationary risk "temporary" — an incorrect position the Fed took before the 2022 inflationary shock in 2022."You don't want to make a different mistake because you're so afraid of making this the first mistake," she says."The second mistake is we are afraid that inflation is just around the corner, and we just wait for it to occur, and in the meantime, the labor market softens."

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