(Reuters) -San Francisco Federal Reserve President Mary Daly said on Friday that while she is still comfortable with a couple of interest rate cuts this year, rising risks of inflation mean the central bank may need to do less, especially given that uncertainty over President Donald Trump’s trade policy has so far done little to disrupt still-solid 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 at an event held by 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 held the policy rate steady in the 4.25%-4.50% range since December. Policymakers have generally said tariffs are likely to increase inflation and slow the economy. Many, including Fed Chair Jerome Powell, say they want to wait and see what actually happens on trade and other policies before making any adjustments, a view that Daly also embraced.
The Fed’s wait-and-see approach on interest rates has angered Trump, and on Friday a Trump adviser said the administration is studying options for firing Powell.
Daly said it is possible the Fed could deliver more than two rate cuts this year if inflation drops faster than expected or the labor market falters. But it was clear she sees more danger on the other side of the coin.
“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 said, adding that she estimates 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.”
Very gradual progress on inflation, she said, requires a restrictive monetary policy stance; and a strong economy gives the Fed plenty of time to wait for more clarity on the total impact of the new administration’s policies, which also include tax cuts, reductions to government spending, deregulation and immigration restrictions. So far, she said, the uncertainty over those policies has not slowed the economy.
“We haven’t heard a lot about pulling back and hunkering down,” she said. “Uncertainty has not stalled out activity … people are ready to engage.”
Daly noted that recent developments suggest Trump’s tariff policy will not be as big, broad, or take as immediate effect as what was initially announced – factors that could reduce its impact on the economy.
(Reporting by Ann Saphir in Berkeley, California; Editing by Lisa Shumaker and Matthew Lewis)
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