San Francisco Fed President Mary Daly said she supports lowering interest rates at the central bank’s meeting next month because she sees a sudden deterioration in the job market as both more likely and harder to manage than an inflation flare-up.
“On the labor market, I don’t feel as confident we can get ahead of it,” she said in an interview on Monday. “It’s vulnerable enough now that the risk is it’ll have a nonlinear change.” An inflation breakout, by contrast, is a lower risk given how tariff-driven cost increases have been more muted than anticipated earlier this year, she said.
Daly’s views are notable because while she doesn’t have a vote on monetary policy this year, she has rarely taken a public position at odds with Fed Chair Jerome Powell. The chair is likely to play the key role resolving differences on a divided rate-setting committee about whether to cut rates or pause at its meeting Dec. 9-10.
Daly said she still thinks the Fed can bring inflation back to its 2% target without an increase in unemployment—and that failing to do so would represent a policy failure.
While the economy has settled in a “low-hiring, low-firing” equilibrium for some time, she sees greater risks that the balance ultimately would break in a negative direction. “If that persists, and you add some additional layoffs, or companies say, ‘My output’s not growing as much as I thought…and I’m going to reduce my employment,’ then I think we are very vulnerable to that,” Daly said.
After consecutive cuts at the Fed’s last two meetings brought rates down to a range between 3.75% and 4% to guard against the risks of a softening job market, Powell and his colleagues must decide whether inflation—which has run closer to 3% than the Fed’s 2% goal—is now a bigger worry.
Interest-rate futures markets saw a strong likelihood on Monday of a rate cut next month, according to CME Group, but that is a recent development.
The probability of a December rate cut had steadily declined this month to less than 50% until New York Fed President John Williams, also an ally of Powell, said on Friday there was room to lower rates “in the near term.” Avoiding “undue risks” to the labor market was as important as returning inflation to the Fed’s goal, he said.
A growing contingent of officials has voiced opposition to or concern about cutting further. They see inflation elevated due to both tariff-exposed goods, which they fear could intensify, and for domestic services, suggesting price pressures might be broadening. They worry about moving rates down too quickly, leaving the Fed in a difficult position if the economy accelerates next year.
Daly said the Fed shouldn’t hold off on cutting rates now out of fear it may need to reverse course later. “I’m not willing to assume our hands are tied next year” in a way that either forecloses the option to cut rates further if the economy weakens more abruptly or to raise rates “if that’s what’s needed,” she said.
Daly said the unusual level of disagreement among Fed officials reflects genuine uncertainty, not dysfunction, and that the central bank would be guilty of being engaged in groupthink if “we were all agreeing right now,” she said. “Our charge wasn’t to have consensus.”
The decision to cut rates or pause rates next month requires “a judgment call about where the risks of not moving are, and where the risks of moving are,” she said. “And so, for me, I put the risks of moving [rates down] a little bit lower than others, and I put the risk of not moving a little bit higher than others.”
Write to Nick Timiraos at Nick.Timiraos@wsj.com